The Italian inflation rate continued to decline in December, adding to speculation that Eurozone monetary policy could ease in months to come.

Consumer prices rose by 0.2 percent, in line with the consensus estimate, taking the annual rate to 0.6 percent from 0.7 percent in November.

The underlying inflation rate declined more dramatically, falling to 3.1 percent from 3.6 percent in November.

Regulated energy prices fell by an annual rate of 41.7 percent (compared to a 34.9 percent fall in November), while non-regulated energy prices declined by 21.1 percent (versus a 22.5 percent fall previously).

The harmonised inflation rate, which feeds into the Eurozone composite reading, rose by 0.2 percent in December, or by 0.5 percent at an annual rate, down from year-over-year rate of 0.6 percent in November.

Eurozone inflation also released on Friday rose to an annual rate of 2.9 percent from 2.4 percent in November, although underlying inflation retreated to 3.4 percent from 3.6 percent previously.

The data take the Italian RPI to minus 4 and the RPI-P to 31.

Prices are expected to rise 0.2 percent versus November, nudging the annual inflation rate a tick lower to 0.6 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. Monthly and annual changes in the CPI provide widely used measures of inflation. A provisional estimate, with limited detail, is released about two weeks before the final data are reported.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the Italy where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. As a member of the European Monetary Union, Italy's interest rates are set by the European Central Bank.

Italy like other EMU countries has both a national CPI and a harmonized index of consumer prices (HICP). Components and weights within the national CPI vary from other countries, reflecting national idiosyncrasies. The core CPI, which excludes fresh food, is usually the preferred indicator of short-term inflation pressures.

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. 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.