Consumer prices in Canada rose 0.5 percent in April, bringing down the 12-month rate to 2.7 percent from 2.9 percent, the lowest reading since 2.2 percent in March 2021, as expected by forecasters in an Econoday survey. Excluding food and energy, the consumer price index was up 0.3 percent on the month and 2.7 percent year-over-year.

The central bank projects inflation to average 2.9 percent in the second quarter, and today's report puts inflation on the right track to meet this projection. In remarks to the Senate Banking Committee at the beginning of May, BoC Governor Tiff Macklem said the data since January have increased the central bank's confidence that inflation will continue to come down gradually despite projected stronger activity. April's readings should comfort this view. Econoday's Relative Performance Index is now consistent with a limited easing risk.

The Bank of Canada's own core measures of inflation came down to 2.7 percent year-over-year on average from 3.0 percent in March, with all three of these measures now below 3.0 percent.

Much of the monthly gain was led by a 7.9 percent increase in gasoline prices from March. Excluding gasoline, the CPI was up 0.2 percent on the month and 2.5 percent on the year. Energy prices rose 5.1 percent on the month and 4.5 percent on the year, while food prices retreated 0.2 percent from March, for a 12-month advance of 2.3 percent.

The second largest upward contributor to the monthly CPI gain, after gasoline, was mortgage interest cost, up 1.2 percent. Rents, up 0.5 percent, were the fourth largest contributor. Mortgage interest cost and rents were the first and second largest contributors to the 12-month CPI advance, with gains of 24.5 percent and 8.2 percent, respectively.

Overall, shelter prices were up 0.5 percent on the month and 6.4 percent from a year earlier. Except for food and recreation, education and reading, all other major categories recorded higher monthly prices. On a 12-month basis, six of the main categories increased, while prices for household operations, furnishings and equipment were down 2.1 percent and clothing and footwear declined 2.6 percent.

Goods prices rose 0.8 percent on the month and 1.0 percent year-over-year, and services were up 0.2 percent and 4.2 percent, respectively.

On a seasonally adjusted basis, the headline CPI was up 0.2 percent on the month and the core index, excluding food and energy, edged up 0.1 percent. Both came down from March.

After March's slightly lower-than-expected 2.9 percent, consumer prices in April are expected to cool to 2.7 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.