South Korea's headline consumer price index rose 2.7 percent on the year in May after an increase of 2.9 percent in April, moving closer to the Bank of Korea's 2.0 percent target. The index rose 0.1 percent on the month after no change previously. The fall in headline inflation was partly driven by food prices. These fell 0.7 percent on the month, with the year-over-year increase slowing from 5.9 percent to 5.1 percent.

Underlying price pressures also moderated slightly in May. Core CPI, excluding food and energy, rose 2.2 percent on the year, easing from an increase of 2.3 percent previously, and advanced 0.2 percent on the month, as it did previously. Housing, transport and energy costs rose at a faster pace, but this was offset by smaller increases in prices for clothing and household goods and health costs.

At its most recent policy meeting, held last month, the BoK left policy rates on hold. Officials advised then that they had retained their forecast for core inflation to moderate but cautioned that"it is premature to be confident that inflation will converge on the target level". They advised that their restrictive monetary policy stance will continue"until such confidence is established". Today's data showing headline inflation remains well above the target level will likely reinforce officials' view that policy settings will need to remain restrictive in upcoming meetings.

Consumer prices in May, which in April came in at 2.9 percent, are expected to edge lower to 2.8 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.