Fri Mar 20 07:30:00 CDT 2015

Consensus Actual Previous
CPI-M/M 0.7% 0.9% -0.2%
CPI-Y/Y 0.9% 1.0% 1.0%
BoC Core-M/M 0.5% 0.6% 0.2%
BoC Core-Y/Y 2.1% 2.1% 2.2%
Core CPI-M/M 0.7% 0.2%
Core CPI -Y/Y 1.8% 1.9%

In line with their usual seasonal pattern, consumer prices rose sharply in February. Moreover, a 0.9 percent monthly increase, the steepest in two years, was notably firmer than expected and large enough to hold the annual inflation rate steady at 1.0 percent.

With a 9.4 percent jump in gasoline costs a key factor in the headline monthly advance, core prices were much better behaved. Even so, excluding food and energy the CPI still rose 0.7 percent on the month and 1.8 percent on the year, down just a tick from last time. The BoC's preferred measure was 0.6 percent higher versus January and 2.1 percent above its year ago level, also only a tick less than its annual rate at the start of 2015.

Seasonally adjusted prices were significantly less buoyant and posted a monthly rise of 0.2 percent. Similarly adjusted, both the ex-food and energy index as well as the BoC's core gauge edged up only 0.1 percent. Overall prices were lifted by a gasoline-led 0.6 percent spike in transportation and a 0.6 percent rise in recreation, education and reading. Elsewhere the next sharpest increases were in the household operations, furnishings and equipment and the alcoholic beverages categories (both 0.3 percent). Food fell 0.1 percent, as did clothing and footwear, while shelter costs were flat.

Today's inflation data underline the sensitivity of headline prices to swings in the oil market but also point to a much sticker underlying index. Economic growth has clearly slowed in recent months but with the dollar having appreciated around 9 percent so far this year, imports have become that much more expensive. However, the slide in the C$ has also loosened monetary policy appreciably which, in turn, has given the BoC time to sit on its hands and see how upcoming economic news rolls in.

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.

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.