Consumer prices rose 0.4 percent in May, slightly more than Econoday's consensus estimate of 0.3 percent. However, the 12-month inflation rate dropped a full percentage point to 3.4 percent from 4.4 percent in May, as expected, reaching its lowest level since June 2021.

Energy prices fell 0.8 percent on the month and 12.4 percent year-over-year, while food increased 0.8 percent from April and 8.3 percent from a year earlier. Excluding food and energy, the core CPI was up 0.4 percent on the month and 4.0 percent year-over-year, down from 4.4 percent in April.

The Bank of Canada's three core measures of inflation all showed evidence of easing inflationary pressures, with the average 12-month rate coming down to 4.3 percent from 4.7 percent in April, with each measure decreasing. In fact, two of them, CPI-trim and CPI-median, were below 4.0 percent, while the CPI-common remained above 5.0 percent.

Gasoline prices, down 18.3 percent on the year and 0.8 percent on the month, were the main downward contributor to the 12-month CPI and the second downward contributor to the monthly CPI, after telephone services. By contrast, housing costs continued to boost prices. Mortgage interest costs rose 1.8 percent on the month and 29.9 percent year-over-year, making them the main upward contributor to the 12-month CPI and the second largest contributor to the monthly CPI. Rents were the second largest contributor to the 12-month CPI, with a 5.7 percent 12-month increase. Excluding mortgage interest costs, the CPI rose 2.5 percent year-over-year, down from 3.7 percent in April. Homeowners' maintenance and repairs, up 8.2 percent on the year, were the fifth largest contributor to the 12-month CPI gain. Overall, shelter prices increased 0.4 percent on the month and 4.7 percent year-over-year. Outside of housing, travel services also lifted monthly prices.

Of the eight main categories, two posted lower prices on the month: transportation, down 0.2 percent, and household operations, furnishings and equipment, down 0.5 percent. Transportation was the only one to record lower prices from a year earlier. Services led gains in May, with prices up 0.5 percent on the month and 4.6 percent year-over-year. Goods prices edged up 0.1 percent and 2.1 percent, respectively.

On a seasonally adjusted basis, the CPI index rose 0.1 percent in May after 0.5 percent in April, and the core index, excluding food and energy, was up 0.2 percent after 0.3 percent.

The central bank projects the 12-month CPI to average 3.3 percent in the second quarter, down from 5.1 percent in the first quarter. Despite today's data showing easing inflationary pressures, June's CPI would have to come in at 2.1 percent for the average to be 3.3 percent in the second quarter.

In the minutes of its June 7 monetary policy meeting that ended with a 25 basis point rate hike to 4.75 percent, the BoC stressed that data since the previous meeting in April pointed to a longer-than-expected rebalancing of supply and demand in the economy. It also noted that wage growth remained above levels consistent with a 2 percent inflation target amid deteriorating productivity. As for consumer inflation, three-month measures of core inflation were not showing a downward trend while housing resale prices increased. The central bank also pointed out the slowing disinflation momentum. It worried about the second stage of disinflation"being more difficult". Today's report will comfort the Bank of Canada which had expressed doubts about the downward momentum of inflation.

After April's 4.4 percent rate, which compared with expectations for 4.0 percent, consumer prices in May are expected to fall noticeably to 3.4 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.