OTTAWA, Aug 21 (Reuters) - Canada's annual inflation rate rose to its highest level in seven months in July as higher prices for food and clothing offset the moderating effect of cheaper energy.
A separate report on Friday showed retail sales rose more than expected in June, though flat volumes dulled the enthusiasm of analysts looking for signs the economy is pulling out of its slump.
Economists said the reports had few implications for monetary policy, with the Bank of Canada looking through temporary inflation factors. The central bank, whose next policy decision is in September, has cut interest rates twice this year to spur the economy, which was likely in recession in the first half of 2015.
"From a GDP standpoint, it really isn't that positive of a development," Andrew Kelvin, senior fixed-income strategist at TD Securities, said of the reports.
"It's still a little early to say what we think what's going to happen with Q3 until we see the trade data," he said. While recent trade data was strong, economists are uncertain whether that will be sustained.
Annual inflation rose to 1.3 percent in July, Statistics Canada said, shy of economists' expectations for 1.4 percent, and the highest level since December.
Core inflation, which strips out volatile items and is closely watched by the bank, rose to 2.4 percent, as forecast. The bank estimates the underlying inflation trend at about 1.5 percent to 1.7 percent.
"What stands out here is Canada does have one of the higher headline inflation rates in the industrialized world," said Doug Porter, chief economist at BMO Capital Markets. "A lot of that is due to the impact of the weakening Canadian dollar."
The Canadian dollar briefly strengthened to a session high after the data was released.
On a year-over-year basis, prices were up in seven of the eight major components of the main inflation index, including a 3.2 percent increase in food. While gasoline and other energy prices fell, the declines moderated.
A monthly increase in gasoline prices and electronics purchases pushed retail sales up by a greater-than-expected 0.6 percent in June.
But volumes were flat after removing the impact of price changes, which won't add to growth, Porter said.
"I think it helps the story that things will recover a touch in (the third quarter)," he said. "It comes too late in the quarter to really save Q2." (Additional reporting by Susan Taylor and Solarina Ho in Toronto; Editing by Peter Galloway)