WRAPUP 1-Canada's annual inflation rate up in September, but retail sales data weighs

By Julie Gordon

OTTAWA, Oct 21 (Reuters) - Canada's annual inflation rate accelerated in September but softer-than-expected retail sales growth for August and a sluggish estimate for September suggest a dampening heading into the holidays, Statistics Canada data showed on Wednesday.

The annual inflation rate rose to 0.5% in September, up from 0.1% in August and just ahead of analyst expectations of 0.4%, driven by transportation, recreation and higher prices for new housing.

Retail sales, meanwhile, rose by 0.4% in August from July, missing analyst expectations of a gain of 1.1%. Statscan's preliminary estimate for September suggested the measure would be "relatively unchanged" for that month.

"There was no real surprise with the CPI; it was so close to expectations," said Doug Porter, chief economist at BMO Capital Markets. "Unfortunately retail sales were disappointing... That probably overshadows the CPI."

The Canadian dollar was trading nearly unchanged at 1.3122 to the greenback, or 76.21 U.S. cents, having pulled back from an earlier six-week high at 1.3081.

The three core measures of inflation were little changed. The common measure, which the Bank of Canada says is the best gauge of the economy's underperformance, remained at 1.5%.

That is likely encouraging for the Bank of Canada, though risks remain, said analysts.

"The fact that underlying inflation is relatively stable somewhat reduces aggressive further action by the BoC. But the fact that retail sales have stalled out means they’ll still be on alert," said Porter.

Bank of Canada Governor Tiff Macklem said earlier this month that bold policy actions taken in response to the coronavirus pandemic had been needed, but will make the economy more vulnerable to economic shocks down the road.

The central bank will release its updated outlook for the Canadian economy next Wednesday along with its regular rate decision. The Bank has signaled interest rates will remain low for at least two years, though it has started winding down some measures aimed at supporting liquidity.

On inflation, prices rose in six of the eight major components in September on a year-over-year basis, Statscan said. Gas prices were down 10.7%, while the increase in prices for passenger vehicles edged up to 2.7%.

Air transportation prices, meanwhile, fell less than usual in September, as usual travel patterns continued to be disrupted by the coronavirus pandemic, Statscan said.

While retail sales missed expectations, they were up 3.5% from a year ago, though sales at clothing stores remain well-below pre-pandemic levels, Statscan said.

Overall, the numbers were not bad, though headline inflation remains quite low, said Andrew Kelvin, chief Canada strategist at TD Securities. Inflation was 2.2% in February, before the pandemic hit.

"It suggests monetary policy will need to remain accommodating for a long period of time," said Kelvin. "It also speaks to the fact that the economy is still in its recovery phase." (Reporting by Julie Gordon and Steve Scherer in Ottawa; additional reporting by Fergal Smith, Nichola Saminather and Moira Warburton in Toronto; Editing by Louise Heavens, Steve Orlofsky and Andrea Ricci)