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* Inflation rises to 0.7 pct from 0.4 pct, still well below target
* Retail sales weaker than expected, volumes healthy
* Canadian dollar slumps to 19-month low after the data
* New central bank chief under little pressure to uphold tightening bias
By Louise Egan
OTTAWA, June 21 (Reuters) - A jump in natural gas prices raised Canada's annual rate of inflation to 0.7 percent in May from a 3-1/2-year low of 0.4 percent, but the figure remained well below the central bank's target, confirming there is little pressure to raise interest rates soon.
The weak numbers knocked the Canadian dollar to its lowest level against the U.S. dollar since December 2011.
Retail sales for April also missed forecasts, gaining just 0.1 percent from March, short of estimates of 0.3 percent growth, as weaker sales at gas stations offset strong car sales.
The consumer price index (CPI) climbed 0.2 percent in the month, Statistics Canada said on Friday. Core CPI, which excludes energy and other volatile items, also gained 0.2 percent, leaving the annual rate unchanged at 1.1 percent.
Both the overall and core inflation rates were below market forecasts of 0.9 percent and 1.2 percent, respectively. Only one out of 23 analysts in a Reuters poll expected CPI as low as 0.7 percent.
Market players were sanguine about the weak numbers and most have said it is too early for new Bank of Canada Governor Stephen Poloz to abandon the mildly hawkish bias the bank maintained for the past 14 months under his predecessor, Mark Carney.
"It was slightly weaker on CPI, but not too much outside expectations. We've been living with weak CPI numbers for a while," said Mark Chandler, head of fixed income and currency strategy at RBC Capital.
"At some point the Bank of Canada is going to have to address the weakness in CPI. To this point they are saying it's OK, inflation expectations have been anchored," he said.
The Canadian dollar slumped to a 19-month low of C$1.0474 versus the U.S. dollar, or 95.47 U.S. cents, after the data was released. That was below Thursday's finish at C$1.0373, or 96.40 U.S. cents.
Chandler said the central bank's quarterly survey of business sentiment, which includes inflation expectations, will be key to Poloz's first rate decision in mid-July.
The Bank of Canada targets 2 percent inflation and has been signaling since April 2012 that its next move on interest rates will be an increase, not a cut, although markets don't expect any move until late 2014.
The central bank said in April that overall and core inflation would remain subdued in the near term, averaging 1 percent and 1.2 percent, respectively, in the second quarter. It said both measures would gradually rise to 2 percent by mid-2015.
A 15.4 percent spike in natural gas prices in the year to May - the biggest increase since December 2008 - was the main reason inflation rose in May, Statscan said. Cheaper gasoline tempered the increase.
By broad categories, shelter (which includes natural gas) and food prices were the biggest contributors to the 12-month rise in the CPI, while transportation (which includes gasoline) exerted the most downward pressure.
May was the 13th consecutive month that inflation was below the Bank of Canada's 2 percent target.
Despite the weaker-than-expected retail sales in April, which would suggest tepid demand when the price effects are removed, retail sales in volume grew 0.5 percent.
Retailers reported higher sales in six of 11 subsectors, representing just over half of total sales.
Overall retail sales were 1.5 percent higher than in April 2012.
On a monthly basis, motor vehicle and parts dealers saw the biggest jump in sales, up 1.4 percent and led by new-car purchases. Gasoline station sales fell 2.9 percent.
Stripping out sales by motor vehicles and parts dealers, retail sales fell by 0.3 percent in April, the same as in March.