Fri Apr 17 07:30:00 CDT 2015

Consensus Actual Previous
CPI-M/M 0.5% 0.7% 0.9%
CPI-Y/Y 1.0% 1.2% 1.0%
BoC Core-M/M 0.3% 0.6% 0.6%
BoC Core-Y/Y 2.1% 2.4% 2.1%
Core CPI-M/M 0.6% 0.7%
Core CPI -Y/Y 2.0% 1.8%

Consumer prices were stronger than expected in March. A 0.7 percent monthly rise in the headline CPI lifted the annual inflation rate from 1.0 percent to 1.2 percent, its highest level since the end of last year.

Core inflation was similarly surprisingly robust. Hence, both the ex-food and energy index and the BoC's preferred measure climbed 0.6 percent versus February to raise the annual rate of the former by 0.2 percentage points to 2.0 percent and of the latter by 0.3 percentage points to 2.4 percent.

Seasonal factors are positive in March but even adjusting for these total prices were up a firm 0.4 percent versus mid-quarter. Similarly adjusted, the ex-food and energy index advanced 0.3 percent and the BoC's gauge 0.4 percent. Within the seasonally adjusted basket the main upward pressure came from higher gasoline prices and this was reflected in a 0.8 percent jump in transportation costs. The next largest monthly increase was in recreation, education and reading (0.4 percent) and most other categories saw a more modest 0.2 percent gain.

Wednesday's BoC interest rate announcement and accompanying MPR suggested that policy is on hold for now with a probably neutral bias. Headline inflation is well below target but this was inevitable in the wake of the slump in energy prices and anyway, the central bank has already eased to accommodate this. Core inflation according to the BoC measure on the other hand has been sticky above 2 percent since August last year and, particularly in the light of today's update, leans in favour of a cautious approach to any further rate cuts. To this end, the second quarter economic data will be particularly important.

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.