Eurozone inflation decelerated again in July. However, although a 5.3 percent flash annual rate was down 0.2 percentage points versus June's final 5.5 percent and the lowest post since January 2022, it was still a tick firmer than the market consensus. The latest reading was also a sizeable 3.3 percentage points above the ECB's target.

More importantly anyway, the slide in the headline rate was only partially mirrored in the core rates. Hence, the narrowest measure was only unchanged at 5.5 percent, also on the firm side of expectations. By contrast, excluding just energy and unprocessed food, the rate dropped from 6.8 percent to 6.6 percent, matching its lowest mark since October 2022. Elsewhere, inflation in non-energy industrial goods decreased from 5.5 percent to 5.0 percent but in services rose from 5.4 percent to 5.6 percent. Energy (minus 6.1 percent after minus 5.6 percent) and food, alcohol and tobacco (10.8 percent after 11.6 percent) both had a negative impact.

The ECB will no doubt have been hoping for a steeper drop in the underlying rate and some much-needed progress on inflation in services. As it is, today's report warns that even if trends are moving in the right direction, they are doing so too slowly. As such, the data increase the chances of another hike in key interest rates in September. More generally, they put the Eurozone ECDI at 7 and the ECDI-P at minus 11, the latter showing that overall real economic activity is still lagging market expectations.

Consensus for July's HICP flash is 5.2 percent and 5.4 percent for the narrow core. These would compare respectively with June's 5.5 and 5.4 percent, the former down from May's 6.1 percent and the latter up from 5.3 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.