Inflation provisionally decelerated again in September and rather more quickly than expected. Prices dipped 0.1 percent on the month, reducing the yearly rate from August's final 2.2 percent to just 1.8 percent, a couple of ticks less than the market consensus and matching its lowest reading since April 2021. The rate now stands 0.2 percentage points below its medium-term target, the first negative gap in more than three years.

News on the core rates was also favourable, albeit less so. The narrowest measure dropped from a yearly 2.8 percent rate to 2.7 percent, a tick short of forecasts, and matching its weakest mark since January 2022. The wider measure that excludes just energy and unprocessed food followed suit, also shedding 0.1 percentage point at 2.7 percent. Inflation in the key services category similarly eased a tick but, at 4.0 percent, remains stubbornly firm with only a flat underlying trend. Lingering effects from the Paris Olympic Games might have been an issue. Elsewhere, the rate in non-energy industrial goods was steady at just 0.4 percent while energy (minus 6.0 percent after minus 3.0 percent) had a significant negative impact and food, alcohol and tobacco (2.4 percent after 2.3 percent) a minimal positive effect.

Regionally, headline inflation fell in France (1.5 percent after 2.2 percent), Germany (1.8 percent after 2.0 percent), Italy (0.8 percent after 1.2 percent) and Spain (1.7 percent after 2.4 percent). In other words, all the four larger member states now have national HICP inflation rates below the ECB's target.

Declining headline and core Eurozone inflation in September should be well received at the ECB and will boost speculation about another cut in policy rates as soon as this month. However, while an increasingly soft regional economy is certainly crying out for lower borrowing costs, the persistent stickiness of prices in the service sector will not sit well with the central bank's hawks. Another ease in October is now more probable, but is not yet a done deal. Today's update trims the Eurozone RPI to minus 23 and puts the RPI-P at minus 11, both gauges showing overall economic activity still lagging market expectations.

Consensus for September's HICP flash yearly rate is 2.0 percent and 2.8 percent for the narrow core. These would compare respectively with August's 2.2 and 2.8 percent and July'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.