WRAPUP 3-Canada inflation exceeds forecast, retail sales rebound

Fri Mar 21, 2014 12:50pm EDT
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(Adds quotes, details on retail sales, link to Instant View)

By Louise Egan

OTTAWA, March 21 (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.   Continued...