Inflation extended its downtrend in mid-quarter. Having peaked at 10.6 percent in October 2022, the annual rate has declined almost every month since and, at a flash 2.6 percent in February, hit its second lowest mark since July 2021. The headline rate is now just 0.6 percentage points above its medium-term target but last month's rate was still slightly on the firm side of the market consensus.

Importantly, core inflation fell again too, albeit similarly by less than expected. The narrowest measure was down 0.2 percentage points at 3.1 percent, a couple of ticks above forecasts but its lowest post since March 2022. Excluding just energy and unprocessed food, the rate dropped a steeper 0.3 percentage points to 3.3 percent. Elsewhere, inflation in non-energy industrial goods decreased from 2.0 percent to 1.6 percent and it also declined sharply in food, alcohol and tobacco (4.0 percent after 5.6 percent). Energy (minus 3.7 percent after minus 6.1 percent) provided another boost and, significantly, services (3.9 percent after 4.0 percent) were only marginally weaker.

Regionally, headline inflation was lower in most member states, including France (3.1 percent after 3.4 percent), Germany (2.7 percent after 3.1 percent) and Spain (2.9 percent after 3.5 percent). Italy was only flat (0.9 percent) but remained beneath the target rate.

The flash February data should sit pretty well with the ECB but will certainly not be enough to force a cut in key interest rates as soon as next week. Most Governing Council members will want to see further progress in the core rate and some additional softening in inflation in services. Still, today's data will not dampen speculation about a full-blown ease next quarter. They also put the Eurozone RPI at 15 and the RPI-P at 4, essentially indicating just a mild degree of outperformance by overall economic activity versus market expectations.

Consensus for February's HICP flash is 2.5 percent and 2.9 percent for the narrow core. These would compare respectively with January's 2.8 and 3.3 percent, the former versus December's 2.9 percent and the latter versus 3.4 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.