Equality in data processing inequality ($I(X;Z)=I(X;Y)⟺I(X;Y\mid Z)=0$)

Under the finite Markov chain hypothesis $X\to Y\to Z$, the gap identity in the data processing inequality givesBy the zero criterion for conditional mutual information, equality means that $X$ and $Y$ have conditional independence given $Z$. After seeing the processed output, the original observation provides no additional information about $X$. Similarly, equality in the other bound, $I(X;Z)=I(Y;Z)$, holds exactly when $I(Y;Z\mid X)=0$.

Equality does not require retaining every detail of $Y$. Let $X,W$ be independent fair bits, put $Y=(X,W)$, and let the processed output be $Z=X$, the first coordinate of $Y$. This is a Markov chain, andAlso $I(X;Y\mid Z)=H(X\mid X)-H(X\mid X,W)=0$. The output discards the entire unrelated bit $W$, reducing $H(Y)=2$ to $H(Z)=1$, while preserving all mutual information about $X$. This is what makes equality useful for choosing a compact observation that retains all information about the quantity of interest.