(Updates Canadian dollar action, paragraph 6)
By Leah Schnurr
OTTAWA, Aug 19 (Reuters) - Canadian retail sales unexpectedly fell in June, reinforcing the likelihood that growth contracted in the second quarter as the economic malaise hit the consumer, who has been a key pillar of support in recent years.
Separately, the annual inflation rate cooled as expected in July, according to data released by Statistics Canada on Friday, pulled down by cheaper gasoline prices, even as the cost of food and shelter climbed.
The 0.1 percent decline in June retail sales was well short of economists’ expectations for a 0.5 percent gain. May’s sales were revised down to show no change from an initially reported 0.2 percent gain.
“It just suggests that maybe the Canadian consumer is growing a bit tired of carrying the burden of growth,” said David Watt, chief economist at HSBC.
“And we don’t really have a lot of other things that are supporting growth right now if the Canadian consumer steps back.”
The retails sales disappointment hit the Canadian dollar , which was recently trading near sessions lows at C$1.2883, or 77.62 U.S. cents, significantly lower than Thursday’s close of C$1.2767, or 78.33 U.S. cents.
Nonetheless, economists do not expect that consumers are down for the count just yet, particularly with the additional money they are getting from the government in the form of a revamped child benefit.
“With Ottawa sending out the first of the Child Care Benefit checks in July, there’s reason to be optimistic on the second half of the year,” Nick Exarhos, economist at CIBC, wrote in a note.
The economy likely contracted in the second quarter, partly due to May’s wildfires in northern Alberta that forced residents to evacuate and disrupted oil production.
Although the data underscored weakness in the economy in the second quarter, analysts and policymakers still expect growth to rebound in the third quarter.
After cutting interest rates twice last year in the face of the oil price slump, the Bank of Canada is seen holding rates where they are until late 2017.
“I think the Bank of Canada continues to look through both readings,” Derek Holt, economist at Scotiabank, said of the day’s reports. “We knew the consumer was going to be weak overall in the second quarter.”
Separate data showed Canada’s inflation rate was 1.3 percent in July, down from 1.5 percent in June. Annual core inflation, which strips out some volatile items and is watched by the central bank, was more robust at 2.1 percent.
The central bank has said the inflation rate is being influenced by temporary factors.
Additional reporting by Fergal Smith and Alastair Sharp in Toronto; Editing by Jeffrey Benkoe