Fri Oct 23 07:30:00 CDT 2015

Consensus Actual Previous
CPI-M/M -0.1% -0.2% 0.0%
CPI-Y/Y 1.1% 1.0% 1.3%
BoC Core-M/M 0.3% 0.2% 0.2%
BoC Core-Y/Y 2.2% 2.1% 2.1%
Core CPI-M/M 0.3% 0.2%
Core CPI -Y/Y 1.8% 1.8%

Consumer prices were slightly weaker than expected in September. A 0.2 percent monthly fall in the headline CPI was soft enough to see the annual inflation rate slide from 1.3 percent in August to 1.0 percent, its first decline since April and equalling its lowest mark since May.

With weaker energy charges again a major factor, both the core indices were rather firmer. Hence, excluding food and energy the CPI rose 0.3 percent from mid-quarter, leaving its annual rate steady at 1.8 percent. At the same time, the BoC gauge climbed 0.2 percent, also ensuring no change in its previous 2.1 percent yearly rate.

Seasonal factors were not a factor in September and after adjustment for these, the CPI still fell 0.2 percent on the month following no change last time. Similarly adjusted, prices less food and energy were also up 0.2 percent while the BoC measure edged just 0.1 percent firmer. Within the adjusted basket the main upward pressure came from recreation, education and reading, and food, both categories seeing a 0.4 percent increase. Alcohol and tobacco gained 0.2 percent but otherwise prices were either flat or posted just a minimal change, the only exception being transport (minus 1.4 percent) where cheaper energy was again a key factor.

The BoC's new inflation forecasts showed overall CPI inflation holding well below 2 percent until into 2017 and its underlying measure relatively stable and close to the target midpoint throughout. September's update does nothing to undermine this view and in turn, suggests that the medium-term outlook for central bank policy remains decidedly unexciting.

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.