Canada's Consumer Price Index was up 0.3 percent in July from June and 1.7 percent year-over-year, below the 1.9 percent consensus estimate in an Econoday survey and down from 1.9 percent in June.

Excluding food and energy, July CPI also rose 0.3 percent on the month, for a 12-month increase of 2.5 percent, still above the 2 percent Bank of Canada target but coming down from 2.6 percent.

Leading the July year-over-year deceleration was a 16.1 percent drop in gasoline prices pushing transportation prices down 1.5 percent. Energy decreased 10.4 percent. Prices appreciated for the seven other major categories. Shelter, up 3.0 percent, and food, up 3.3 percent, were at and above the upper band of the Bank of Canada operational inflation range.

Services inflation was 2.8 percent year-over-year and goods inflation 0.3 percent.

On a monthly basis, clothing and footwear was the only of the eight major categories to record lower prices, with a decline of 1.9 percent, led by women's clothing, the largest downward contributor to the monthly CPI change.

The Bank of Canada's own three measures of core inflation averaged 2.9 percent, unchanged from June. This stickiness is likely uncomfortable for the central bank, which at it July 30 meeting assessed underlying inflation to be around 2.5 percent. At the time, it pointed out the ongoing pressures on core inflation. With today's data showing its own measures unchanged from June, the BoC's assessment is unlikely to be noticeably impacted by the slowdown in the headline inflation measure led by energy.

The Governing Council discussed continued underlying inflationary pressures at its July 30 policy meeting, highlighting continued risks to inflation from trade disruptions and tariffs. Some members, the meeting minutes show, estimated the central bank had already done enough to support the economy. Others pointed out that further monetary policy support would likely be needed. Overall, however, the central bank estimated it was too early to tell how much and how quickly cost increases from tariffs and trade disruptions would be passed on to consumer prices.

The BoC second quarter Business Outlook Survey showed that 51 percent of firms expect inflation to be between 2 and 3 percent over the next two years, up from 44 percent in the first quarter survey.

A sister consumer survey shows consumers perceive inflation to be higher: 3.82 percent currently, with an expectation of 3.85 percent over two years. Consumers expect large increases in motor vehicle prices over the next 12 months, mainly due to tariffs. Purchase of passenger vehicles increased 4.5 percent in July, the third largest upward contributor to the year-over-year CPI change.

Shelter was the main upward contributor to July 12-month CPI change: rent was up 5.1 percent and mortgage interest cost 4.8 percent. Gasoline and air transportation were the two largest downward contributors.

On a seasonally adjusted basis, month-to-month prices edged up 0.1 percent in July after 0.2 percent in June. The core index followed a similar path.

Forecasters see CPI rising at the same 1.9 percent rate on year in July as in June. CPI is seen up 0.4 percent on the month after increasing 0.1 percent in June. The recent end to the carbon tax makes the numbers tricky to parse. Gas prices are expected down but tariff effects on cars and food are working in the other direction along with domestic services

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.