CA: CPI


Thu Feb 26 07:30:00 CST 2015

Consensus Actual Previous
CPI-M/M -0.4% -0.2% -0.7%
CPI-Y/Y 0.7% 1.0% 1.5%
BoC Core-M/M 0.0% 0.2% -0.3%
BoC Core-Y/Y 2.0% 2.2% 2.2%
Core CPI-M/M 0.2% -0.4%
Core CPI -Y/Y 1.9% 1.9%

Highlights
Inflation fell sharply but by less than expected at the start of the year. With prices having risen 0.3 percent in January 2014, an energy-led 0.2 percent monthly decline in the CPI shaved fully 0.5 percentage points off the annual headline rate to 1.0 percent, its lowest mark since November 2013.

Gasoline prices were nearly 27 percent weaker on the year after a 16.6 percent drop in December and accounted for much of the deceleration in the overall measure. Predictably then, the underlying picture was rather more robust. Hence, excluding food and energy the CPI was up 0.2 percent on the month which left its yearly change steady at 1.9 percent. Similarly, the BoC's gauge was also 0.2 percent firmer than in December and equally flat at a 2.2 percent annual rate.

Seasonal factors are broadly neutral in January and adjusted for these overall prices also fell 0.2 percent on the month. Similarly adjusted the ex-food and energy index advanced 0.2 percent and the BoC measure a relatively firm 0.3 percent. Within the seasonally adjusted basket the slump in energy costs was apparent in a 2.5 percent monthly decline in transportation charges but elsewhere prices were somewhat higher. In particular, food gained 0.7 percent, alcoholic beverages and tobacco products 0.5 percent and health and personal care 0.3 percent.

January's slide in inflation may have been attributable to weaker oil prices but it was the same factor that saw the BoC surprisingly cut interest rates 25 basis points last month. As such today's unexpectedly firm report should leave the central bank no less dovish and ensure that there is still plenty of speculation about another monetary ease next week.

Definition
The Consumer Price Index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation. Changes in the CPI are critical to the Bank of Canada which has an inflation target range of 1 percent to 3 percent.

Description
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 Canada, 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.

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 CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

As the most important indicator of inflation the CPI is closely followed by the Bank of Canada. The Bank of Canada has an inflation target range of 1 percent to 3 percent but focuses on the 2 percent midpoint. It uses CPI and core which excludes food and energy as their prime inflation indicators. However, for operational purposes, the Bank also monitors a core CPI which excludes eight volatile items including fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products.