Fri Nov 17 07:30:00 CST 2017

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

October consumer price index edged up 0.1 percent on the month and was up 1.4 percent from a year ago as anticipated. On the year, prices were up in seven of the eight major CPI components with the transportation and shelter indexes contributing the most to the increase. The clothing & footwear index declined on the year. The annual gain was a slowdown from September's 1.6 percent increase, but should not surprise the Bank of Canada, which expects fourth quarter CPI to average 1.4 percent and not reach the 2 percent target before mid-2018.

Transportation prices rose 3.0 percent on the year after increasing 3.8 percent in September. This deceleration was led by gasoline prices, which increased 6.5 percent in October after increasing 14.1 percent the previous month in the aftermath of Hurricane Harvey. At the same time, the purchase of passenger vehicles index rose 1.5 percent on the month providing the impetus for the largest annual gain in this index since March 2017.

The recreation, education and reading index increased an annual 1.5 percent in October, following a 2.1 percent increase in September. Prices for travel tours contributed the most to this deceleration. The recreational services index increased 5.2 percent following a 14.7 percent increase in September. Meanwhile, prices for digital computing equipment & devices (down 4.4 percent) declined at a slower rate on the year in October than in September.

On a seasonally adjusted monthly basis, the CPI increased 0.2 percent in October, matching the gain in September. Six major components increased while two declined. The household operations, furnishings & equipment index (0.5 percent) and the health & personal care index (0.5 percent) recorded the largest increases. The recreation, education & reading index (down 0.3 percent) and the food index (down 0.2 percent) both declined.

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.