Fri Dec 18 07:30:00 CST 2015

Consensus Actual Previous
CPI-M/M 0.1% -0.1% 0.1%
CPI-Y/Y 1.5% 1.4% 1.0%
BoC Core-M/M 0.0% -0.3% 0.3%
BoC Core-Y/Y 2.3% 2.0% 2.1%
Core CPI-M/M -0.2% 0.2%
Core CPI -Y/Y 1.8% 1.7%

Consumer prices fell 0.1 percent on the month in November. However, the unexpected decline still saw the annual inflation rate jump fully 0.4 percentage points to 1.4 percent as the effects of last year's slump in energy prices ensured significantly positive base effects.

Underlying prices were weaker still. Hence, the CPI ex-food and energy was 0.2 percent lower than in October although, at 1.8 percent, its annual rate was a tick up on last time. Meanwhile, the BoC's preferred core index dropped a sizeable 0.3 percent on the month, enough to shade its yearly rate from 2.1 percent to 2.0 percent, its weakest print since July 2014.

Seasonal factors tend to depress prices in November and adjusted for these the CPI was up 0.2 percent on the month, matching its October advance. On the same basis, the ex-food and energy index and the BoC's underlying gauge both edged just 0.1 percent firmer. Within the adjusted basket, the main upward pressure came from transportation, where prices climbed a monthly 0.8 percent, ahead of clothing and footwear (0.6 percent) and food and drink (also 0.6 percent). The downside was boosted by decreases in household operations, furnishings and equipment (0.6 percent) and recreation, education and reading (0.3 percent).

According to the BoC's yardstick, the annual underlying inflation rate has been at or above 2 percent every month since August 2014. This did not prevent the central bank cutting key interest rates in January and July so November's surprisingly soft outturn should certainly not stand in the way of another ease. The central bank seems more than willing to attribute the relative firmness of the core to one-off factors and not a function of excess domestic demand.

In fact, so far the fourth quarter economy has not shaped up too well and, in the wake of a sluggish November employment report, could yet be paving the way to another monetary ease at some point in 2016.

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.