Fri Nov 18 07:30:00 CST 2016

Consensus Actual Previous
CPI-M/M 0.3% 0.2% 0.1%
CPI-Y/Y 1.5% 1.5% 1.3%
BoC Core-M/M 0.3% 0.2% 0.2%
BoC Core-Y/Y 1.8% 1.7% 1.8%
Core CPI-M/M 0.2% 0.4%
Core CPI -Y/Y 1.9% 2.0%

October consumer prices were up 0.2 percent on the month and 1.5 percent from the same month a year ago. Excluding food and energy the CPI was also up 0.2 percent but was 1.9 percent higher on the year. The important Bank of Canada core rate which excludes eight volatile items was also up 0.2 percent and was 1.7 percent higher on the year.

On the year, prices were up in six of the eight major components in the 12 months to October, with the transportation and shelter indexes contributing the most to the year-over-year rise in the CPI. This increase in the CPI was moderated by a decline in the food index. The transportation index rose 3.0 percent on the year following a 2.3 percent gain in September. This acceleration was mainly attributable to gasoline prices, which posted a 2.5 percent annual increase after declining 3.2 percent in September. The passenger vehicles index was up 4.4 percent and remained the top upward contributor to the 12-month change in the transportation index.

The shelter index posted its largest increase since January 2015, rising 1.9 percent after a 1.7 percent gain in September. Food prices posted their first decline since January 2000, down 0.7 percent on the year after rising 0.1 percent in September. Prices for food purchased from stores recorded their largest decline since July 1992.

On a seasonally adjusted monthly basis, the CPI increased 0.2 percent for a second month. Five major components increased while two declined. The recreation, education and reading index was unchanged.

Inflation continues to be well within the Bank of Canada's inflation target zone.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly and annual changes in the CPI provide widely used measures of inflation. The policy target measure for the Bank of Canada (BoC), the annual CPI rate can be distorted by swings in the more volatile subsectors so the central bank also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.

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.