January 20, 2017 07:30 CST

Consensus Actual Previous
CPI-M/M 0.0% -0.2% -0.4%
CPI-Y/Y 1.7% 1.5% 1.5%
BoC Core-M/M -0.3% -0.5%
BoC Core-Y/Y 1.6% 1.5%
Core CPI-M/M -0.4% -0.4%
Core CPI -Y/Y 1.8% 1.7%

December consumer price index was down 0.2 percent on the month and up 1.5 percent when compared with December 2015. On a seasonally adjusted monthly basis, the CPI increased 0.3 percent in December, after declining 0.1 percent in November. Six major components increased on a seasonally adjusted monthly basis, while the alcoholic beverages and tobacco products index declined 0.1 percent. The food index was unchanged. The transportation index (up 1.5 percent) posted the largest gain.

Prices were up in seven of the eight major components in the 12 months to December, with the transportation and shelter indexes contributing the most to the annual increase in the CPI. The food index declined on this basis for the third consecutive month.

The transportation index rose on a year-over-year basis for the fifth consecutive month, up 3.0 percent in December, after a 1.4 percent gain in November. This increase was led by gasoline prices, which increased 5.5 percent following a 1.7 percent decline in November. At the same time, the purchase of passenger vehicles index was up 2.6 percent after increasing 3.0 percent the month before. The clothing and footwear index increased 0.2 percent following a 1.2 percent decline in November. Consumers paid 1.3 percent less for food in the 12 months to December.

Inflation continues to move toward the Bank of Canada's 2 percent target. The BoC expects it to reach its target over the next 18 months.

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.