OTTAWA, Nov 20 (Reuters) - Canadian retail sales disappointed in September, pointing to soft growth heading into the fourth quarter, while inflation was benign in October, suggesting the central bank will keep monetary policy on hold next month even if U.S. rates rise.
Retail sales unexpectedly fell by 0.5 percent due to lower gasoline prices and a decrease in sales at motor vehicle and parts dealers, data from Statistics Canada showed on Friday.
Economists had expected a gain of 0.2 percent. Excluding the effect of price changes, sales volume edged up 0.1 percent.
"This is a soft end to the quarter for retail sales," said Soctiabank economist Derek Holt. "The slight volume gain was mildly encouraging but the breadth of the declines reinforced the headline weakness."
Gasoline station sales tumbled 3.7 percent, to their lowest since January as consumers paid lower prices at the pump. Motor vehicle and parts sales dipped 0.5 percent, ending seven months of gains.
Canada was in a mild recession during the first half of the year. While growth likely picked up in the third quarter, recent data pointed to a decline in growth in September.
That suggests the risk recovery will not be as strong as policymakers had anticipated, said Doug Porter, chief economist at BMO Capital Markets.
"The third quarter was a mild rebound from the weakness that we saw in the first half of the year, for a variety of reasons, but it looks as if the sluggish underlying trend has reasserted itself here in the fourth quarter," he said.
The Canadian dollar weakened against the greenback immediately after the report.
Separate data showed the annual inflation rate was 1.0 percent in October, held at the lower end of the central bank's target range by cheaper energy prices.
The as-expected figures suggest policymakers have room to stay accommodative. After cutting rates twice this year to offset the economic damage of lower oil, the central bank is expected to leave rates on hold when it meets next month.
Prices were higher in seven of the eight major components of the consumer price index, led by a 4.1 percent increase in food prices. Transportation was the only decliner, driven by the drop in gasoline prices.
Core inflation, which strips out volatile items and is watched by the Bank of Canada, was more robust, staying at a 2.1 percent annual rate.
Additional reporting by Alastair Sharp, Susan Taylor and Fergal Smith in Toronto; Editing by Bernadette Baum