Inflation increased in December by 0.2 percent on a month-on-month, reversing November's 0.2 percent decline, while rising to 1.2 percent year-on-year versus 1.1 percent in November, according to preliminary estimates.

Core inflation which excludes energy and fresh food rose 0.3 percent in December from a month ago and 1.8 percent year-on-year, an uptick from to 1.7 percent in November.

Transportation costs were 1.4 percent higher in December than in November, but rose a more modest 0.6 percent from their year-ago level. At the same time, recreation and culture saw a 0.7 percent gain over the previous month.

Prices for regulated energy contracted 5.3 percent in December following November's 3.2 percent decline.

Overall prices for services continue to outpace those for goods, with the former increasing 0.3 percent month-on-month and 2.5 percent year-on-year. The cost of goods rose 0.1 percent in December from a month ago and 0.2 percent from December of last year.

The HICP used to compare inflation among European economies also saw prices rose 0.2 percent in December and 1.2 percent from a year ago.

Inflation remains well within the comfort zone of policy makers, and gives flexibility for interest rates should the broader European economy stagnate.

The consumer price index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly and annual changes in the CPI provide widely used measures of inflation. A provisional estimate, with limited detail, is released about two weeks before the final data are reported.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the Italy where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. As a member of the European Monetary Union, Italy's interest rates are set by the European Central Bank.

Italy like other EMU countries has both a national CPI and a harmonized index of consumer prices (HICP). Components and weights within the national CPI vary from other countries, reflecting national idiosyncrasies. The core CPI, which excludes fresh food, is usually the preferred indicator of short-term inflation pressures.

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. 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.