Inflation provisionally accelerated in July. Prices were only flat on the month but this was still strong enough to lift the yearly inflation rate from June's final 2.5 percent to 2.6 percent, a couple of ticks above the market consensus and 0.6 percentage points higher than its medium-term target.

The key core rates were slightly better behaved but also held their ground. Hence, the narrowest measure was again unchanged at 2.9 percent, a tick above expectations, while the measure excluding just energy and unprocessed food was steady at 2.8 percent. Services posted a 0.1 percentage point dip to 4.0 percent, still high but at least a 3-month low, while the non-energy industrial goods rate was a tick firmer at 0.8 percent. Energy (1.3 percent after 0.2 percent) provided a moderate boost but food, alcohol and tobacco (2.3 percent after 2.4 percent) was broadly stable.

Regionally, headline inflation rose in France (2.6 percent after 2.5 percent), Germany (also 2.6 percent after 2.5 percent) and Italy (1.7 percent after 0.9 percent) but fell again in Spain (2.9 percent after 3.6 percent).

The flash July report will leave financial markets guessing about the outcome of the September ECB meeting. Key to the decision will be the core rates, which were again disappointingly high today, and services, where inflation has fallen but remains double the target. The flash data for August will probably need to show a softer tone if investors are to be convinced that another cut in interest rates is just around the corner. Indeed, today's update puts the Eurozone RPI at 9 and the RPI-P at minus 9 -- the gap between the two readings reflecting unexpectedly firm prices.

Consensus for July's HICP flash is 2.4 percent and 2.8 percent for the narrow core. These would compare respectively with June's 2.5 and 2.9 percent and with May's 2.6 and 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.