Consumer prices edged up 0.1 percent in October, for a 12-month increase of 3.1 percent, down from 3.8 percent in September. Both readings were slightly below expectations of 0.2 percent and 3.2 percent, respectively, in an Econoday survey. Excluding food and energy, consumer prices were up 0.5 percent on the month and 3.4 percent year-over-year, up from 3.2 percent.

While inflation measures excluding food and energy increased year-over-year, the Bank of Canada's own core measures reflected further easing of inflationary pressures. All three measures slowed down for the second consecutive month, to average 3.8 percent in October after 4.0 percent in September and 4.3 percent in August. Currently, Econoday's Relative Performance Index is consistent with a stable monetary policy.

Overall, the data show improvement but the rise in the core index excluding food and energy is a reminder that the central bank's work is far from over. That being said, with a projection of 3.3 percent in the fourth quarter, the 3.1 percent headline reading provides some room to take some time to assess the impact of past rate hikes.

Food prices were down 0.1 percent on the month and rose 5.6 percent year-over-year, and energy fell 4.6 percent from September and 5.4 percent from a year earlier. The monthly CPI decrease was led by a 0.8 percent drop in goods prices, while services increased 0.9 percent. On a 12-month basis, the two categories rose, by 1.6 percent and 4.6 percent, respectively.

Half of the eight main components were up on the month, while three decreased: transportation was down 1.4 percent, led by a 6.4 percent drop in gasoline prices, and like food, health and personal care edged down 0.1 percent. Gasoline was the largest downward contributor, followed by traveller accommodation and electricity. The main upward contributors to the monthly CPI were travel tours (up 11.1 percent), property taxes and other special charges (up 4.9 percent), followed by mortgage interest cost (2.5 percent) and rent (1.4 percent).

On a 12-month basis, five of eight components increased. Mortgage interest costs (up 30.5 percent) and rent (up 8.2 percent) were the largest upward contributors, while gasoline (down 7.8 percent) and telephone services (down 14.1 percent) were the largest downward contributors.

On a seasonally adjusted basis, the headline CPI was down 0.1 percent after rising 0.1 percent in September, while the core index was up 0.3 percent after 0.2 percent.

After September's lower-than-expected 3.8 percent rate, consumer prices in October are expected to slow to 3.2 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.