Inflation provisionally accelerated in May for the first time this year. A 0.2 percent monthly rise in the flash HICP put the annual rate at 2.6 percent, up from April's final 2.4 percent and a tick above the market consensus. The latest reading matches its highest mark since January and means that inflation is now 0.6 percentage points above its medium-term target.

The underlying gauges also edged firmer. The narrowest measure was similarly up 0.2 percentage points at 2.9 percent, a couple of ticks above forecasts and its first increase since last June. Excluding just energy and unprocessed food, the rate was also 2.9 percent, up from 2.8 percent last time. Somewhat ominously, the latest gains were led by services where inflation jumped from 3.7 percent to 4.1 percent, its highest print since October 2023. By contrast, non-energy industrial goods dipped from 0.9 percent to 0.8 percent and food, alcohol and tobacco from 2.8 percent to 2.6 percent. Energy (0.3 percent after minus 0.6 percent) provided a small boost.

Regionally, headline inflation accelerated in most member states, including France (2.7 percent after 2.4 percent), Germany (2.8 percent after 2.4 percent) and Spain (3.8 percent after 3.4 percent). Italy (0.8 percent after 0.9 percent) posted a small fall.

The flash May data are unlikely to come a big surprise to the ECB but the sharp jump in inflation in services will surely raise a few eyebrows. A cut in key interest rates next week is still very likely but the probability of another ease in July has just fallen further. Today's update puts the Eurozone RPI at 14 and the RPI-P at 3, pointing to a limited degree of outperformance by overall economic activity but only due to the surprising strength of prices.

Consensus for May's HICP flash is 2.5 percent and 2.7 percent for the narrow core. These would compare respectively with April's 2.4 and 2.7 percent, the former unchanged from March's 2.4 percent and the latter down from 2.9 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.