Following its year-end bounce, Eurozone inflation decelerated at the start of 2024. At 2.8 percent, down from December's final 2.9 percent, the flash annual rate was in line with the market consensus and now only 0.8 percentage points above its 2 percent target. However, the January print was just a 2-month low having only dented the 0.5 percentage point gain in the previous period.

Still, crucially too, core inflation continued to fall. The narrowest measure was down 0.1 percentage point at 3.3 percent, again matching the market consensus and its lowest post since March 2022. Excluding just energy and unprocessed food, the rate dropped a steeper 0.3 percentage points to 3.6 percent. Elsewhere, inflation in non-energy industrial goods decreased from 2.5 percent to 2.0 percent and also declined in food, alcohol and tobacco (5.7 percent after 6.1 percent). Against that, energy (minus 6.3 percent after minus 6.7 percent) provided a small boost and, importantly, services were again only flat (4.0 percent).

Regionally, inflation was lower in most member states, notably France (3.4 percent after 4.1 percent) and Germany (3.1 percent after 3.8 percent). However, both Italy (0.9 percent after 0.5 percent) and Spain (3.5 percent after 3.3 percent) saw their rates accelerate.

The flash January data should come as little surprise to the ECB and will probably do nothing to impact the Governing Council's expected profile to key interest rates in 2024. The declines in both headline and, more significantly, core inflation leave open the door to a cut in rates later but the stickiness of prices in services very probably rules out a move as soon as March. Today's updates put the Eurozone RPI at 4 and the RPI-P at 5, both readings showing overall economic activity performing much as expected.

Consensus for January's HICP flash is 2.8 percent and 3.3 percent for the narrow core. These would compare respectively with December's 2.9 and 3.4 percent, the former up from November's 2.4 percent but the latter down from 3.6 percent.

The flash harmonised index of consumer prices (HICP) provides an early estimate of the final HICP, but using just partial data. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Final data are released a round two weeks later. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Two of these are made available in the flash report amongst which financial markets normally concentrate upon the narrowest which excludes energy, food, alcohol and tobacco.

The measure of choice in the Eurozone is the harmonized index of consumer prices (HICP) which has been constructed to allow cross member state comparisons. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In the Eurozone, where monetary policy decisions rest on the ECB's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

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 your mortgage and auto loans to Treasury bills, notes and bonds. 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 HICP are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.