Consumer prices increased more than expected in March from February, as they were up 0.5 percent, above Econoday's consensus of 0.4 percent. Inflation pressures eased on a year-over-year basis, however, with the CPI rising 4.3 percent from March 2022, down from 5.2 percent in February, the lowest 12-month rate since August 2021, in line with expectations.

Year-over-year inflation benefitted from base effects as prices appreciated 1.4 percent in March 2022 from the previous month. The average 12-month inflation rate for the first quarter declined to 5.1 percent from 6.7 percent in the fourth quarter, slightly below the Bank of Canada's 5.2 percent projection, an encouraging sign for the central bank.

The pattern was similar for core prices excluding food and energy, which increased 0.6 percent on the month after 0.5 percent in February, while they rose 4.5 percent year-over-year, down from 4.8 percent the previous month, the lowest rate since February 2022. Food was up 0.2 percent month-to-month and 8.9 percent year-over-year. Energy was up 0.7 percent and down 6.9 percent, respectively.

The Bank of Canada's three core measures of inflation all showed evidence of easing upward pressure, with the average 12-month rate coming down to 5.0 percent in March from 5.4 percent in February. The range was 4.4 percent to 5.9 percent, down from 4.8 percent to 6.4 percent.

All main categories recorded higher prices both month-to-month and year-over-year, with goods prices up 0.6 percent on the month and 3.6 percent year-over-year, and services up 0.5 percent and 5.1 percent, respectively.

Travel tours and mortgage interest costs were the two largest upward contributors to the monthly CPI. Mortgage interest costs, up 26.4 percent from March 2022, were the largest contributor to the 12-month CPI gain, followed by rent (5.3 percent.). A 13.8 percent drop in gasoline was the largest 12-month downward contributor.

On a seasonally adjusted basis, the CPI index edged up 0.1 percent in March, the same as in February, for a steady increase of 0.3 percent excluding food and energy.

In its April Monetary Policy Report, the Bank of Canada expected the year-over-year CPI to average 5.2 percent in the first quarter and 3.3 percent by mid-2023. Inflation is then projected to decline more gradually to the 2 percent target by the end of 2024. However, the central bank's Business Outlook Survey showed that firms' inflation expectations have moderated, but most businesses still think inflation will stay well above 2 percent until at least 2025. At the consumer level,"expectations for inflation in the near term have edged down but remain elevated." Even five years ahead, consumers still expect inflation to be closer to 3 percent.

After February's 5.2 percent, which was down noticeably from January's 5.9 percent rate, consumer prices in March are expected to slow further to 4.3 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.