Inflation pressures eased more than expected in February, as the CPI index was up 0.4 percent on the month and 5.2 percent year-over-year from 5.9 percent in January, compared with Econoday's consensus forecasts of 0.5 percent and 5.4 percent, respectively. This is the smallest 12-month advance since January 2022.

Food prices appreciated 0.6 percent on the month and 9.7 percent from February 2022, and energy decreased 1.2 percent and 0.6 percent, respectively. Excluding food and energy, core prices picked up to 0.5 percent, but the 12-month rate came down to 4.8 percent from 4.9 percent, the lowest rate since 4.6 percent in April 2022.

The Bank of Canada's three core measures of inflation averaged 5.4 percent in February, down from 5.6 percent in January, with all three measures showing signs of easing inflation pressures. The range came down to 4.8-to-6.4 percent from 5.0-to-6.6 percent.

Prices increased for seven of the eight main categories on the month, offsetting a 0.4 percent decline in transportation led by a 1.0 percent drop in gasoline prices. The latter were the third largest downward contributor to the monthly CPI, behind child care and housekeeping services as well as natural gas. Telephone services, mortgage interest cost and rent were the largest positive contributors.

Prices increased for all eight categories year-over-year, with three of the top upward contributors related to housing: the largest contributor was mortgage interest cost (up 23.9 percent); the third largest was rent (5.4 percent) and the fifth was homeowners' replacement cost (3.3 percent). Gasoline prices, down 4.7 percent year-over-year, were the largest downward contributor.

On a seasonally adjusted basis, the CPI index edged up 0.1 percent in February after 0.3 percent in January. However, excluding food and energy, core price gains accelerated to 0.3 percent from 0.1 percent.

Although core prices are not slowing down as fast as the headline index, today's data reflecting easing inflation pressures are a welcome development for the Bank of Canada as it continues to fight inflation while facing higher financial stability risks. In its March 8 policy statement, the BoC maintained its expectation of an inflation rate coming down to 3 percent in the middle of this year, as the weakening economy eases wage growth pressures and increases competition between businesses, making it harder to pass on higher prices to consumers.

The central bank expects the 12-month CPI rate to average 5.4 percent in the first quarter. With rates of 5.2 percent in February and 5.9 percent in January, March would have to come in at 5.1 percent to match the anticipated average. Anything below would be a positive surprise.

After January's lower-than-expected 5.9 percent, down from December's 6.3 percent rate, consumer prices in February are expected to slow further to 5.4 percent.

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 the CPI and three measures of the underlying rate as the prime inflation indicators. Markets also look at core rate which excludes food and energy.