Consumer prices in Canada slipped by 0.2 percent in August from July after rising 0.4 percent in July, not seasonally adjusted, bringing the 12-month increase to 2.0 percent in August from 2.5 percent in July. Forecasters in an Econoday survey looked for increases of 0.1 percent on the month and 2.1 percent from a year ago.

Excluding food and energy, the consumer price index declined 0.1 percent on the month and rose 2.4 percent year-over-year. Seasonally adjusted, overall CPI rose 0.1 percent in August from July.

The slowing in consumer prices reduced the annual headline increase to its lowest since February 2021, and is likely to bolster the Bank of Canada's dovish stance. The decline in annual price inflation partly reflected lower gasoline prices, which dropped 5.1 percent, partly due to a base-year effect and partly due to global oil prices. Excluding gas, CPI rose 2.2 percent in August, down from 2.5 percent in July.

Mortgage interest costs and rent remained the biggest factors pushing annual CPI higher. Having said that, the rate of increase in mortgage interest costs slowed for a 12th straight month to 18.8 percent in August, down from a peak of 30.9 percent in August 2023.

The Bank of Canada's own core measures of inflation came in at 2.2 percent year-over-year on average in August, down from 2.4 percent in July and 2.5 percent in June, with all three measures remaining well below 3.0 percent, the top of the bank's one percent to three percent target range.

After July's as-expected 2.5 percent rate that was down from June's 2.7 percent, consumer prices in August are expected to cool further to 2.1 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.