February 19, 2016 / 1:46 PM / 2 years ago

Food, gasoline lift Canada annual inflation rate to 2 percent in January

OTTAWA (Reuters) - Canada’s annual inflation rate picked up to 2 percent in January, the highest since November 2014, lifted by food prices and a rise in gasoline costs and underlining expectations the Bank of Canada will keep monetary policy unchanged next month.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

Separately, retail sales slumped in December as unseasonably warm weather in many parts of the country cut into seasonal purchases, data also released by Statistics Canada showed on Friday.

Annual inflation was 2 percent, surpassing economists’ expectations for 1.7 percent, and bringing the rate up to the midpoint of the Bank of Canada’s target.

After being suppressed by a drop in energy prices, gasoline prices jumped 2.1 percent, the first annual increase since October 2014. Nonetheless, prices still fell 6 percent on a monthly basis.

Food costs rose 4 percent as consumers paid 18.2 percent more for fresh vegetables, suggesting the impact of a weaker Canadian dollar was being felt.

Derek Holt, economist at Scotiabank, said the firmer inflation figures reinforced ideas that the Bank of Canada will pause on monetary policy for an extended period.

“They have been fairly explicit on communicating that to the markets, more on the side of tossing the ball back to the federal government and on stimulus expectations,” he said.

After cutting interest rates twice last year, the bank held steady at its last meeting in January, noting concern about the sharp drop in the loonie. The bank is widely expected to keep policy unchanged again in March. BOCWATCH

The Canadian dollar extended losses against the greenback immediately after the data. [CAD/]

Prices rose in seven of the eight major components of the consumer price index. The clothing and footwear segment was the only component to decline, dropping an annual 0.3 percent.

The annual core inflation rate, which strips out the prices of some volatile items and is watched by the Bank of Canada, was also 2 percent, slightly higher than expected and up from 1.9 percent in the previous month.

December’s 2.2 percent decline in retail sales far exceeded the 0.6 percent drop that was expected and was the largest such decline since April 2010.

Motor vehicles and parts dealers, a category that also includes sellers of snowmobiles, saw a 3.9 percent decrease. Lower sales were widespread across categories, including clothing and general merchandise stores.

Analysts had expected to see a drop in sales after November’s figures were partly lifted by Black Friday shopping.

Additional reporting by David Ljunggren in Ottawa, Fergal Smith in Toronto; Editing by Bernadette Baum

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