Fri Sep 18 07:30:00 CDT 2015

Consensus Actual Previous
CPI-M/M 0.0% 0.0% 0.1%
CPI-Y/Y 1.3% 1.3% 1.3%
BoC Core-M/M 0.2% 0.2% 0.0%
BoC Core-Y/Y 2.1% 2.1% 2.4%
Core CPI-M/M 0.2% 0.0%
Core CPI -Y/Y 1.8% 2.0%

Consumer prices matched expectations in August. With prices also unchanged on the month in the year ago period, another steady reading this time round saw headline annual inflation unmoved at 1.3 percent to equal its firmest reading since December 2014.

Underlying prices were rather stronger but base effects still ensured a slowdown in yearly rates. Hence, excluding food and energy the CPI was up 0.2 percent on the month, in line with the market consensus, which lowered its annual rate from 2.0 percent to 1.8 percent. At the same time, the BoC's preferred gauge also gained 0.2 versus July. This was enough to shave 0.3 percentage points off its yearly rate to 2.1 percent, matching its weakest print since last July.

Seasonal factors are only minor in August and adjusted for these the CPI was also flat at July's level. Similarly adjusted, the ex-food and energy index edged up only 0.1 percent as did the BoC's core gauge. Within the adjusted basket the main positive pressure on prices came from household operations, furnishings and equipment and clothing and footwear (both categories up 0.4 percent) ahead of alcohol and tobacco (0.3 percent). The chief offset came from transportation (minus 0.7 percent) where lower gasoline prices were a major feature, although health and personal care charges (minus 0.1 percent) were also soft.

Having seen the economy slide into recession last quarter inflation is hardly a concern for the BoC. In fact the central bank's core measure has been stubbornly above 2 percent since July 2014. Early signs that GDP will return to positive growth this quarter have dampened speculation about additional central bank easing but for now the risks to a steady policy remain for another rate cut. To this end, financial markets should continue to be the particularly sensitive to the third quarter real economy data.

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.