Fri Jun 19 07:30:00 CDT 2015

Consensus Actual Previous
CPI-M/M 0.5% 0.6% -0.1%
CPI-Y/Y 0.8% 0.9% 0.8%
BoC Core-M/M 0.3% 0.4% 0.1%
BoC Core-Y/Y 2.1% 2.2% 2.3%
Core CPI-M/M 0.2% 0.0%
Core CPI -Y/Y 1.8% 1.9%

Consumer prices rose a slightly stronger than expected 0.6 percent on the month in May. This was enough to nudge the annual inflation rate just a tick firmer to 0.9 percent, its second consecutive reading below the 1 percent mark.

Core prices were rather softer. Hence, excluding food and energy prices were up only 0.2 percent from the start of the quarter to yield an annual rate of 1.8 percent, down from 1.9 percent in April. At the same time, the BoC's preferred measure increased a monthly 0.4 percent, reducing its yearly rate from 2.3 percent to 2.2 percent.

Seasonal factors are quite positive in May and after adjusting for these the overall CPI rose 0.4 from April when it dipped 0.1 percent. Similarly adjusted, the ex-food and energy index was 0.1 higher and the BoC's measure 0.2 percent stronger. Within the adjusted basket the main upward pressure came from recreation, education and reading where prices advanced a monthly 0.8 percent. Elsewhere, transportation (0.5 percent) also saw an above average gain while clothing and footwear (minus 0.2 percent) was the only area of obvious weakness.

While headline inflation has been quite volatile in recent months due to sharp swings oil costs, underlying trends have been much more stable. Indeed, the BoC's annual core rate has held within a tight 2.1-2.4 percent range since last August. May's update does nothing to alter this picture and, accordingly, should leave the central bank cautiously content with its existing policy stance.

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.