Fri May 22 07:30:00 CDT 2015

Consensus Actual Previous
CPI-M/M 0.1% -0.1% 0.7%
CPI-Y/Y 1.0% 0.8% 1.2%
BoC Core-M/M 0.1% 0.1% 0.6%
BoC Core-Y/Y 2.3% 2.3% 2.4%
Core CPI-M/M 0.0% 0.6%
Core CPI -Y/Y 1.9% 2.0%

Following their surprisingly robust rise in March, consumer prices edged lower on the month in April. An unexpected 0.1 percent dip reduced the annual inflation rate by 0.4 percentage points to 0.8 percent, its slowest pace since October 2013.

Core prices were rather firmer. Hence, excluding food and energy the CPI was unchanged versus March and now stands 1.9 percent higher on the year after a 2.0 percent increase last time. The BoC's preferred measure was up 0.1 percent on the month, in line with expectations, and, at 2.3 percent, its annual rate was a tick down compared with the previous period's mark.

Seasonal factors are not particularly relevant in April and adjusted for these the CPI also dipped 0.1 percent from March when it was up 0.3 percent. Similarly adjusted the ex-food and energy index advanced 0.1 percent while the BoC gauge was unchanged. Within the adjusted basket the main upward pressure on prices came from alcohol and tobacco products which posted a 0.5 percent increase and household operations, furnishings and equipment (0.4 percent). On the downside, recreation, education and reading fell 0.6 percent, clothing and footwear 0.3 percent and both transportation and shelter 0.2 percent.

April's inflation update should have little immediate impact on BoC policy. The April MPR put second quarter headline inflation at an annual 0.8 percent rate and today's data leave this call broadly on track. On the central bank's definition, underlying inflation has been above 2 percent every month since last July but not sufficiently so as to prompt any worries at a central bank that is still trying to work out how much damage the slump in oil prices has cause the local economy. BoC policy is going nowhere in a hurry.

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.