Inflation provisionally decelerated a little faster than expected in mid-quarter. Prices were up 0.2 percent on the month, reducing the yearly rate from July's final 2.6 percent to 2.2 percent, a tick less than the market consensus and matching its lowest reading since June 2021. The rate now stands just 0.2 percentage points above its medium-term target.

However, news on the core rates was more mixed. On the positive side, the narrowest measure dipped from 2.9 percent to 2.8 percent, in line with forecasts and its second weakest mark since February 2022. By contrast, the wider measure excluding just energy and unprocessed food was again steady at 2.8 percent. Moreover, services saw an unwelcome 0.2 percentage point rise to 4.2 percent, a 10-month high albeit possibly due to one-off Olympics effects. Elsewhere, non-energy industrial goods inflation eased from 0.7 percent to just 0.4 percent while energy (minus 3.0 percent after 1.2 percent) and, to a lesser extent, food, alcohol and tobacco (2.4 percent after 2.3 percent) accelerated.

Regionally, headline inflation fell in France (2.2 percent after 2.7 percent), Germany (2.0 percent after 2.6 percent), Italy (1.3 percent after 1.6 percent) and Spain (2.4 percent after 2.9 percent).

The headline results should go down very well at the ECB but the relative stickiness of core and service sector prices will be a problem for the central bank's hawks. A cut in key interest rates next month is still a probability but it is not guaranteed and a move then is likely to be accompanied by a statement indicating that further progress would be needed for any additional ease. Today's updates put the Eurozone RPI at 14 and the RPI-P at 22, both gauges showing overall economic activity running slightly ahead of market expectations.

Consensus for August's HICP flash is 2.3 percent and 2.8 percent for the narrow core. These would compare respectively with July's 2.6 and 2.9 percent and June's 2.5 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.