Consumer prices fell 0.3 percent on the month in December for a 12-month increase of 3.4 percent, in line with expectations and up from 3.1 percent in November. The year-over-year acceleration was mostly led by higher gasoline prices due to base effects. Excluding gasoline, the year-over-year rate slowed to 3.5 percent from 3.6 percent.

Excluding food and energy, prices also contracted 0.3 percent from November and rose 3.4 percent from a year earlier, above the 3.3 percent consensus in an Econoday survey but still marking a deceleration from 3.5 percent in November. The Bank of Canada's own measures of core inflation averaged 3.7 percent in December, unchanged from November.

Despite the acceleration in the headline number, the fourth quarter average came down to 3.2 percent from 3.7 percent the previous quarter, slightly below the 3.3 percent projection by the Bank of Canada. But the fourth quarter BoC survey of consumer expectations points to a slow pace in the easing of inflation with near-term inflation expectations little changed, which limits chances of a rate cut soon. On the supply side, the central bank's business outlook survey released Monday points to a moderation in labour shortages and easing wage growth, albeit"only gradually". Importantly, businesses expect inflation to remain above the 2 percent target"for some time".

Food prices in December rose 0.3 percent on the month and 5.0 percent year-over-year, while energy prices fell 2.6 percent and 0.4 percent, respectively. Gasoline prices dropped 4.4 percent on the month, the second largest downward contributor to the CPI monthly decline following travel tour prices, which dropped 18.2 percent. Gasoline prices increased 1.4 percent year-over-year.

Overall, five of the main eight CPI categories declined on the month: recreation, education and reading; health and personal care; alcoholic beverages, tobacco products and recreational cannabis; clothing and footwear; household operations, furnishings and equipment. By contrast, transportation increased 0.6 percent despite lower gasoline prices, and shelter was up 0.4 percent from November. A 31.1 percent gain in air transportation, a 1.8 percent increase in mortgage interest costs, and a 0.7 percent gain in rent made these three items the largest upward contributors to the monthly CPI.

All eight categories increased year-over-year. Mortgage interest cost and rent were the two largest positive contributors, with increases of 28.6 percent and 7.7 percent.

Services prices were flat in December and increased 4.3 percent year-over-year, and goods prices fell 0.8 percent for a 12-month advance of 2.4 percent.

On a seasonally adjusted basis, the headline CPI increased 0.3 percent in December, the same as in November, while the core index, excluding food and energy, slowed to 0.2 percent from 0.3 percent.

In 2023, the consumer price index rose 3.9 percent on an annual average basis, down from a 40-year high of 6.8 percent in 2022.

After November's annual rate of 3.1 percent, consumer prices in December are expected to rise to 3.4 percent. But the core rate, in contrast, is expected to slow to 3.3 percent from 3.5 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.