Canada inflation exceeds forecast, retail sales rebound

Fri Mar 21, 2014 12:54pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canada's inflation rate slowed in February but, unexpectedly, stayed within the central bank's comfort zone, news that may reassure policymakers but is unlikely to trigger a change in the bank's neutral stance on interest rates.

Statistics Canada also released figures on Friday that showed retail sales regained some ground in January after taking a big hit in December due to extreme winter weather. Sales in increased by 1.3 percent in January, the fastest pace since May.

Both reports signaled the economy moved to a stronger footing in early 2014 after a soft patch in December.

"Good news on both fronts," said Benjamin Tal, senior economist at CIBC World Markets. "The retail sales was better than expected, defying expectations for a softer consumer. But even more important was the CPI (consumer price index)."

Consumer prices rose 1.1 percent in the year to February, down from a 1-1/2 year high of 1.5 percent in January but above the market forecast for a 0.9 percent increase. Lower gasoline prices partially offset higher shelter and food costs in February, it said.

Core inflation, a gauge of underlying price trends, was also a notch above expectations at 1.2 percent, but down from 1.4 percent in January.

Chronically weak inflation is the Bank of Canada's biggest headache at the moment because it often means a stagnant economy, and it is the reason the bank dropped a policy bias toward raising interest rates last year. The bank aims to keep inflation at 2 percent, within a range of 1 percent to 3 percent. The inflation rate has been below 2 percent for 22 months.

The latest data may put to rest any lingering speculation that the bank will cut rates this year, said Paul Ferley, assistant chief economist at Royal Bank of Canada.   Continued...

People shop in the Eaton Centre shopping mall as they walk by a giant reindeer Christmas decoration in Toronto, December 7, 2012. REUTERS/Mark Blinch