Consumer prices unexpectedly contracted in September, when they edged down 0.1 percent on the month, bringing down the 12-month rate to 3.8 percent from 4.0 percent, both below Econoday's consensus estimates of 0.3 percent and 4.1 percent, respectively. Excluding food and energy, prices were also down 0.1 percent on the month, and increased 3.2 percent from a year earlier.

Adding to the good news for the Bank of Canada, its own core measures all reflected easing inflationary pressures in September, with the average 12-month rate coming down to 4.0 percent in September from 4.3 percent in August.

Despite the September slowdown, the 12-month CPI rate averaged 3.7 percent in the third quarter, up from 3.5 percent in the second quarter and above the 3.3 percent projected by the Bank of Canada in its July Monetary Policy Report. Looking ahead, the third quarter business outlook survey released Monday shows firms are still planning"larger and more frequent price increases" than prior to the pandemic. The consumer expectations sister survey showed"persistently high" inflation expectations for the next 12 months.

Goods prices were down 0.3 percent on the month, for a 12-month increase of 3.6 percent, while services were flat, leading to a year-over-year rate of 3.9 percent.

A 14.6 percent drop in air transportation and a 1.3 percent decrease in gasoline prices were the main contributors to lower monthly prices. On a 12-month basis, telephone services, natural gas and air transportation were the top three downward contributors.

On the upside, mortgage interest costs, up 2.6 percent on the month and 30.6 percent year-over-year, were the main upward contributors to both the monthly and 12-month CPI. The second largest upward contributor was rent, up 0.8 percent on the month and 7.3 percent from a year earlier. Overall shelter was up 0.5 percent on the month and 6.0 percent year-over-year. Clothing and footwear rose 0.9 percent on the month; health and personal care was up 0.1 percent; alcoholic beverages, tobacco products and recreational cannabis edged up 0.1 percent. The monthly increases were more than offset by declines the other main categories.

Food was down 0.1 percent on the month and up 3.8 percent year-over-year and energy fell 1.0 percent but rose 5.4 percent from a year earlier.

On a seasonally adjusted basis, inflation also gave signs of easing in September, with the headline CPI rising 0.2 percent after 0.6 percent in August, and the core index up 0.1 percent after 0.3 percent.

After August's higher-than-expected 4.0 percent rate, consumer prices in September are expected to edge yet higher to 4.1 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.