Consumer prices were flat in January and rose 2.9 percent year-over-year, below expectations of increases of 0.4 percent and 3.2 percent, respectively, in an Econoday survey. Excluding food and energy, prices edged down 0.1 percent from December and were up 3.1 percent from a year earlier.

Food prices were up 0.7 percent on the month and 3.9 percent year-over-year, while energy fell 1.1 percent and 2.7 percent, respectively, with gasoline down 0.9 percent and 4.0 percent.

Also reassuring, the Bank of Canada's own core measures of inflation, which averaged 3.4 percent year-over-year in January, down from 3.7 percent in December, with all three measures slowing down.

The BoC's minutes of the January meeting pointed out the"slow" progress toward price stability. But today's lower-than-expected readings should bring some comfort, especially after U.S. inflation data indicated inflation south of the border was stickier than expected. Today's report brought Econoday's Relative Performance Index down to minus 19. While this level is consistent with a minor underperformance of the economy and limited easing risk, it is two points away from indicating building easing risk.

Today's headline inflation rate of 2.9 percent puts the first quarter average on a path to a lower rate than the 3.2 percent projected by the central bank for the first quarter.

Looking at the main eight categories, monthly declines in transportation, recreation, education and reading, as well as clothing and footwear, were offset by monthly increases elsewhere. On a 12-month basis, six of eight categories increased.

Shelter costs continued to put upward pressure on prices, which should remain a concern for the BoC. It said in its minutes that should the housing market rebound more than expected in the spring,"shelter inflation could keep CPI inflation materially above the target even while price pressures in other parts of the economy abated." In January, mortgage interest cost, up 1.6 percent, and rents, up 0.7 percent, were the first and third largest upward contributors to the monthly CPI. The two categories were up 27.4 percent and 7.9 percent year-over-year, respectively, making them the two largest upward contributors to the 12-month CPI advance. Overall, shelter prices increased 0.3 percent from December and 6.2 percent from a year earlier.

Air transportation, down 23.7 percent, was the largest downward contributor to the monthly CPI, while telephone services were the largest downward contributor to 12-month inflation.

Both services and goods prices were flat on the month, with 12-month gains of 4.2 percent and 1.3 percent, respectively.

On a seasonally adjusted basis, the headline CPI edged down 0.1 percent in January while the core index, excluding food and energy, was up 0.1 percent, down from 0.2 percent in December.

After December's 3-tenths rise to 3.4 percent, consumer prices in January are expected to fall back 2 tenths 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.