Consumer prices in Canada rose 0.6 percent in March from February and 2.9 year-over-year, sightly less than expectations of 0.7 percent and 3.0 percent, respectively, in an Econoday survey. Still, the monthly gain hasn't been this large since July 2023.

Excluding food and energy, the CPI rose 0.7 percent on the month, up from 0.2 percent in February, and increased 2.9 percent year-over-year, up from 2.8 percent the previous month.

Food was down 0.2 percent on the month and up 3.0 percent year-over-year, and energy rose 2.1 percent and 2.8 percent, respectively.

The Bank of Canada's own core measures of inflation came down to 2.9 percent year-over-year in March on average, from 3.1 percent in February and 3.3 percent in January.

The 2.9 percent headline inflation rate brought the first-quarter average to 2.9 percent from 3.2 percent in the fourth quarter of 2023, roughly in line with the Bank of Canada's projection of 2.8 percent in its April Monetary Policy Report. The central bank projects the average to remain steady at 2.9 percent in the second quarter. In its MPR, the BoC pointed out that the easing in inflation has been broad-based with a declining share of prices rising by more than 3 percent. It also highlighted signs of softening wage growth with the range of measures declining to 3.5 percent to 4.5 percent from 4 percent to 5 percent. That being said, productivity would need to increase significantly for wage growth to be compatible with the two percent inflation target.

While March's headline report was slightly better than expected, the move towards the two percent target has been slowing, with the CPI 12-month increase of 2.9 percent no lower than it was in January. This stabilization calls for more wait and see from the BoC. In fact, Econoday's Relative Performance Index, very near the zero line at minus 2, is currently in line with a stable monetary policy.

In March, shelter components and gasoline prices were among the top upward contributors to inflation both on a monthly and yearly basis. Gasoline was up 4.9 percent on the month and 4.5 percent year-over-year. Rent increased 0.9 percent from February, and mortgage interest costs 1.2 percent, for 12-month gains of 8.5 percent and 25.4 percent, respectively. Overall shelter prices increased 0.4 percent on the month and 6.5 percent from a year earlier. Four more of the eight major categories were up on the month: clothing and footwear (2.8 percent); transportation (1.5 percent); recreation, education and reading (2.0 percent); and alcoholic beverages, tobacco products and recreational cannabis (0.5 percent). All major items were up year-over-year, led by a 6.5 percent gain in shelter, except for clothing and footwear, as well as household operations, furnishings and equipment.

Overall, services prices appreciated 0.7 percent on the month and 4.5 percent year-over-year, and goods prices were up 0.5 percent and 1.1 percent, respectively.

On a seasonally adjusted basis, both the headline and core CPI excluding food and energy were up 0.3 percent on the month, up from 0.1 percent in February.

After February's lower-than-expected to 2.8 percent, consumer prices in March are expected to increase to 3.0 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.