In the latest report on Eurozone inflation, the harmonised index of consumer prices showed an unrevised month-over-month increase of 0.1 percent and year-over-year rise of 2.2 percent, the latter down from July's final 2.6 percent. The narrow core inflation, which excludes energy, alcohol food and tobacco, also matched its flash estimates and so still shows a 0.3 percent monthly gain and a 2.8 percent yearly rate, a tick short of the July rate.

Services inflation continues its upward trend, rising by 0.1 percentage points to 4.1 percent, marking its fourth consecutive month above 4 percent. On the other hand, non-energy industrial goods showed a significant decline, falling by 0.3 percentage points to 0.4 percent. Energy prices took a sharp drop to -3.0 percent following a 1.2 percent rise, highlighting volatility in this sector. Food, alcohol, and tobacco inflation held steady at 2.3 percent, showing resilience in consumer staples.

Regionally, headline inflation fell in France (2.2 percent after 2.7 percent), Germany (2.0 percent after 2.6 percent), Italy (1.2 percent after 1.6 percent) and Spain (2.4 percent after 2.9 percent). In contrast, headline inflation rose in Denmark (1.4 percent after 1.0 percent) and Greece (3.2 percent after 3.0 percent).

The latest EU inflation report suggests challenging conditions for the ECB ahead of its October meeting. Both core inflation and services inflation, which have remained elevated, indicate underlying price pressures in the economy despite falling energy prices. These trends suggest that inflationary dynamics have become more entrenched, especially in sectors like services, where price increases continue. Moreover, with the Eurozone RPI (minus 2) and RPI-P (minus 12), the real economy would welcome any reduction in borrowing costs.

The harmonised index of consumer prices (HICP) is a measure of consumer prices used to calculate inflation on a consistent basis across the European Union. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Eurostat provides statistics for the EU and Eurozone aggregates, individual member states and for the major subsectors. 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. Amongst these, financial markets normally concentrate upon the narrowest gauge which excludes energy, food, alcohol and tobacco.

The measure of choice in the European Monetary Union (EMU) is the harmonized index of consumer prices 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 European Monetary Union, 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.