Highlights
Consumer prices were a little softer than expected at the start of the current quarter but not sufficiently so as to prevent annual inflation moving into positive territory for the first time since May 2009.
The unadjusted headline CPI dipped 0.1 percent on the month, boosting its 12-month rate by a full percentage point to 0.1 percent. At the same time, the core index (excluding food and energy) rose 0.2 percent from September for an annual rate of 1.3 percent, up 0.4 percentage points from last time. The BoC's preferred measure edged up 0.1 percent on the month to lift its 12-month rate to 1.8 percent from 1.5 percent.
Seasonal factors helped to keep prices in check in October. Indeed, the seasonally adjusted CPI rose 0.4 percent on the month following a 0.1 percent gain last time. This was the fifth month out of the last six that seasonally adjusted prices have risen.
Within the 0.4 percent overall advance, prices were also up 0.4 percent on the month in clothing and footwear and 0.3 percent in recreation, education and reading. Shelter and household operations and furnishings both recorded a 0.2 percent increase. By contrast, prices fell 0.6 percent in health and 0.2 percent in transportation.
Not surprisingly, the bulk of the acceleration in the annual CPI rate was due to developments in energy prices. In particular, gasoline prices fell only 13.1 percent in the year to October after a 23.0 percent decline in the 12 months to September. Excluding energy, the annual CPI rate last month was 1.4 percent, up just a tick from its September pace.
With base effects now firmly positive, the annual headline rate is set to trend steadily higher into the first half of 2010. However, this should come as no surprise to the BoC which, in its most recent Monetary Policy Report, forecast an acceleration to 1.4 percent by the first quarter and 1.6 percent by year-end. The (BoC) core rate was projected at 1.4 percent and 1.7 percent in the same periods respectively.
Definition The Consumer Price Index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation.
Why Investor's Care 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 a inflation target range of 1 percent to 3 percent but focuses on the 2 percent midpoint. It uses CPI and core which excludes food and energy as their prime inflation indicators. However, for operational purposes, the Bank also monitors a core CPI which excludes eight volatile items including fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products.