Retail inflation was lower than expected in June, when the consumer price index edged up only 0.1 percent on the month and 2.8 percent year-over-year, the lowest 12-month rate since March 2021. The readings are below Econoday's consensus forecasts of 0.3 percent and 3.0 percent, respectively. Excluding food and energy, the slowdown was also faster than expected, bringing the monthly rate to flat and the 12-month rate to 3.5 percent.

Today's data put the second quarter average year-over-year inflation rate at 3.5 percent, compared with the Bank of Canada's 3.6 percent projection (revised up from 3.3 percent), and down from 5.1 percent in the first quarter. The readings provide some breathing room to the central bank, allowing it to take some time to assess the impact of the cumulative rate hikes since March 2022. In fact, with June's report in, Econoday Consensus Divergence Index, minus 7, stands within a zone consistent with an economy sightly underperforming.

All three of the Bank of Canada's core measures of inflation continued to show evidence of easing pressures, with the average 12-month rate coming down to 4.2 percent in June from 4.3 percent in May.

Services prices edged up 0.1 percent on the month and 4.2 percent year-over-year, and goods prices rose 0.2 percent and 1.4 percent, respectively.

Monthly declines of 1.7 percent in clothing and footwear, 0.8 percent in recreation, education and reading, and 0.6 percent in household operations, furnishings and equipment were offset by higher prices in other key categories, including a 1.9 percent advance in gasoline that boosted transportation prices, and a 0.5 percent gain in shelter. Gasoline and mortgage interest costs, up 1.6 percent on the month, were the second and third main upward contributors, behind traveller accommodation prices, which were up 11.6 percent.

On a 12-month basis, all prices increased except for a 3.4 percent decline in transportation led by a 21.6 percent drop in gasoline, the main downward contributor. The June CPI excluding gasoline was up 4.0 percent, still down from 4.4 percent in May. By contrast, a 30.1 surge in mortgage interest costs and a 5.8 percent appreciation in rents were the main upward contributors to the 12-month CPI increase.

The monthly seasonally adjusted CPI index also rose 0.1 percent in June after being flat in May. The core index, excluding food and energy, advanced at a steady pace of 0.1 percent.

After May's as-expected 3.4 percent rate, which was down a full percentage point from April, consumer prices in June are expected to slow further to 3.0 percent. The core rate, after gains of 0.4 and 4.0 percent, is expected at 0.3 and 3.7 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.