Fri Oct 20 07:30:00 CDT 2017

Consensus Actual Previous
CPI-M/M 0.3% 0.2% 0.1%
CPI-Y/Y 1.7% 1.6% 1.4%
BoC Core-M/M 0.2% 0.0%
BoC Core-Y/Y 0.8% 0.9%
Core CPI-M/M 0.2% 0.0%
Core CPI -Y/Y 1.21% 1.5%

September consumer prices were up a monthly 0.2 percent. The CPI was up 1.6 percent from the same month a year ago following a 1.4 percent gain in August. Excluding food and energy, the CPI was up 0.2 percent and 1.2 percent on the year. Excluding just gasoline, the index rose 1.1 percent on the year for a third month. With a Bank of Canada policy meeting looming (October 25), the inflation measure is getting close scrutiny. The BoC now sees inflation rising for a third month.

Prices were up in six of the eight major CPI components in the 12 months to September, with the transportation and shelter indexes contributing the most to the increase rise. The clothing & footwear and household operations, furnishings & equipment both declined on the year.

Transportation costs rose 3.8 percent on the year following a 2.8 percent increase in August. For a third consecutive month, gasoline prices were the largest contributor to the gain in transportation prices and also to their acceleration. The gasoline index rose 14.1 percent in the 12 months to September, largely due to supply disruptions caused by Hurricane Harvey. The purchase of passenger vehicles index accelerated 1.0 percent on the year, up from a 0.7 percent increase in August.

Food prices were up 1.4 percent on the year after increasing 0.9 percent in August. Recreation, education & reading costs rose 2.1 percent, matching the increase in August. Tuition fees grew 3.0 percent in the 12-month period ending in September.

On a seasonally adjusted monthly basis, the CPI increased 0.2 percent in September, matching the gain in August. Five major components increased while three decreased. On a seasonally adjusted monthly basis, the transportation posted the largest gain, while the clothing and footwear index posted the largest decline.

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.