South Korea's headline consumer price index rose 3.2 percent on the year in December, moderating slightly from an increase of 3.3 percent in November and moving closer to the Bank of Korea's 2.0 percent target. The index was unchanged on the month after falling 0.5 percent previously.

Underlying price pressures also moderated in December. Core CPI, excluding food and energy, rose 2.8 percent on the year, down from 3.0 percent in November, and advanced 0.2 percent on the month after no change previously. Food price inflation was steady at 6.2 percent.

At their most recent policy meeting, held late-November, the BoK left policy rates on hold. Officials noted then that recent increases in headline inflation largely reflected higher energy and food prices and reiterated that they expect inflation to trend lower over the medium-term. Consistent with that assessment, data published since then have shown a fall in headline inflation in both November and December. The fall in underlying inflation shown today will likely reinforce the case for policy rates to remain on hold at the BoK's next meeting mid-January.

Consumer prices in December, which in November decreased sharply to 3.3 percent from October's 3.8 percent, are expected to move further lower to 3.2 percent.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Annual changes in the CPI represent the rate of inflation.

An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from mortgages and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.