January 23, 2015 / 2:23 PM / 3 years ago

WRAPUP 1-Canada annual inflation drops to 1.5 percent on lower gas prices

OTTAWA, Jan 23 (Reuters) - Lower gasoline costs pulled down the Canadian annual inflation rate in December to a nine-month low, Statistics Canada said on Friday, two days after the Bank of Canada cut interest rates due to slumping oil prices.

The annualized rate in December dropped to 1.5 percent from 2.0 percent in November, which is the midpoint of the Bank of Canada’s 1 to 3 percent target range. The rate of inflation - the lowest since the 1.5 percent recorded in March 2014 - matched market expectations.

The central bank shocked markets on Wednesday by cutting rates on the grounds that slumping crude prices threatened both its inflation target and economic growth.

But in a sign that inflation was not totally benign, the measure of core inflation - which strips out the prices of some volatile items and is closely watched by the Bank of Canada - increased to 2.2 percent from 2.1 percent.

A 16.6 percent drop in gasoline prices was the main reason for a slower yearly rise in overall inflation to December. Prices increased in seven of the eight major components in the consumer price index.

TD Securities strategist David Tulk said the markets had not yet recovered from the shock of Wednesday’s rate cut.

“Data wise, it’s really focused on the price of oil and evidence of impacts on the Canadian economy from that oil price shock, because that’s really what the Bank of Canada has wrapped their analysis around,” he said.

On a monthly basis, overall inflation dropped 0.7 percent while the core measure declined 0.3 percent.

Doug Porter, chief economist at BMO Capital Markets, said the rise in the core measure indicated that inflation was more potent than the central bank had thought.

“I think they (the Bank) are looking at many other factors, but I think at the very least the underlying strength in core has probably caused at least one forehead to wrinkle at the Bank of Canada today,” he said.

Separately, Statistics Canada said retail sales unexpectedly rose 0.4 percent in November to a new record high. Market analysts had predicted a 0.2 percent decline.

Despite the cheerful headline figure, gains were only reported in five of 11 subsectors, representing 27 percent of retail trade. The three largest subsectors - motor vehicles and parts dealers, food and beverage stores and gasoline stations - all posted slight declines.

Additional reporting by Allison Martell, Euan Rocha and Susan Taylor in Toronto; Editing by Bernadette Baum

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