Fri Jul 17 07:30:00 CDT 2015

Consensus Actual Previous
CPI-M/M 0.2% 0.2% 0.6%
CPI-Y/Y 1.0% 1.0% 0.9%
BoC Core-M/M -0.2% 0.0% 0.4%
BoC Core-Y/Y 2.1% 2.3% 2.2%
Core CPI-M/M 0.0% 0.2%
Core CPI -Y/Y 1.8% 1.8%

Consumer prices moved in line with expectations in June. A 0.2 percent monthly rise saw the annual inflation rate edge just a tick firmer to 1.0 percent, its strongest reading since March.

Core prices were unchanged on the month on both the ex-food and energy and BoC measures. This left the former's annual rate steady at 1.8 percent but saw the central bank's preferred index accelerate from 2.2 percent to 2.3 percent.

Prices are seasonally soft in June and adjusted for such effects the CPI rose a monthly 0.4 percent, matching its increase in May. Similarly adjusted, the ex-food and energy index gained 0.2 percent and the BoC measure a marginally firmer 0.3 percent. All subsectors bar health and personal care (0.0 percent) recorded monthly advances. However, only transportation (1.3 percent) registered an above average increase and the majority saw rises of 0.2 percent or less.

Having only just seen the BoC cut key interest rates by 25 basis points on Wednesday financial markets are unlikely to be moved by today's inflation update. The central bank's preferred underlying gauge has been running consistently above 2 percent since August 2014 but that has not prevented two monetary easing already this year. Moreover, with the new MPR deferring the attainment of full capacity until early 2017, another 2 percent plus core rate now is even less likely to trouble the monetary authority.

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.