WRAPUP 2-Data shows Canada recovery intact, inflation muted

* Aug retail sales up 0.5 pct; market expected no change

* Annual inflation rate 1.9 pct vs 1.7 pct in August

* Core CPI rate slips to 1.5 pct year-over-year

* Analysts see no pressure for rate increase soon
(Adds link to graphics, details on federal deficit in final
paragraph)

By John McCrank and David Ljunggren

TORONTO, Oct 22 (BestGrowthStock) – Canada’s economic recovery
appears intact, with consumers spending more in stores this
summer, but inflation remains subdued, suggesting interest
rates are on hold until 2011, two reports showed on Friday.

Retail sales rose a higher than expected 0.5 percent in
August, helped by a rebound in furniture stores and higher
gasoline prices, Statistics Canada said. It also revised its
July retail sales figure to show a 0.1 percent rise versus its
initial estimate of a 0.1 percent drop.

Earlier, Statscan said the annual inflation rate rose to a
relatively tame 1.9 percent in September, as expected,
prompting analysts to predict the Bank of Canada would keep
interest rates steady for the time being.

“The stronger than expected data for retailing, together
with similar news on manufacturing and wholesaling reported
earlier, is a modest negative for fixed-income markets that are
now pricing in a very dovish outlook for the Bank of Canada,”
CIBC World Markets economists Avery Shenfeld and Emanuella
Enenajor said in a note.

“Still, with core inflation very tame and the overall
quarter still looking lackluster, the next round of rate hikes
will likely be a few quarters away.”

Canadian bond prices were little changed following the
reports, while the currency touched a session high of C$1.0224
to the U.S. dollar, or 97.81 U.S. cents, after the retail sales
data. [CAD/]
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For graphics on retail sales and inflation data, see:

http://graphics.thomsonreuters.com/F/10/CA_RETAIL1010.gif

http://graphics.thomsonreuters.com/F/10/CA_CPI1010.gif
For inflation INSTANT VIEW see [ID:nN22150066]
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Consumer spending was one of the main engines of the
economic recovery earlier in the year, but it faltered in
recent months, partly due to the introduction of new sales tax
regimes in the populous provinces of Ontario and British
Columbia.

Friday’s report showed total sales volumes were up 0.3
percent.

Gasoline sales rose the most in dollar terms, up 2.1
percent. Furniture and home furnishing stores also saw a 2.1
percent rise, following two months of declines.

The biggest decrease came in the sporting goods, hobby and
music stores subsector, which was down 1.8 percent.

Sales of motor vehicles and parts rose 0.7 percent, led by
automotive parts and accessories.

Still, some analysts said there were elements of weakness
in the report.

“The details don’t show broad-based gains. Canadians
basically bought cars, filled them with gas to go to the
supermarket and to shop for some home furnishings (which only
partly reversed a record drop). Most other sales categories
were either up a little or down,” Jonathan Basile,
vice-president, economics, at Credit Suisse Securities said in
a note.

INFLATION PRESSURES TAME

Separately, Statistics Canada said higher energy and
transportation costs pushed the consumer price index up to 1.9
percent in September from the 1.7 percent recorded in August.

The annual core inflation rate, which strips out volatile
items and the effects of tax changes, dropped to 1.5 percent
from 1.6 percent in August. Analysts had expected 1.6 percent.

The figures are unlikely to alarm the Bank of Canada, which
kept interest rates on hold this week and promised to consider
any future hikes carefully. It predicted both measures of
annual inflation would hit its 2.0 percent target by the end of
2012. [ID:nN22157729]

“I don’t think it’s much in the way of a market mover
simply because of what we already know from the Bank of Canada
this week, and I don’t think as well that it’s going to have
much of an impact on their near-term thinking,” said Mark
Chandler of RBC Capital Markets.

Prices increased in seven of the eight major components of
inflation, with clothing and footwear as the only exception.
Energy prices advanced 5.6 percent during the 12 months to
September, compared with a 5.0 percent rise in August.

“Inflation remains tame in Canada, which will allow the
Bank of Canada to stay on hold well into 2011,” said Robert
Kavcic of BMO Capital Markets.

Traders are split over when the central bank — which
raised rates three consecutive times between June and September
— will move again.

A Reuters poll of Canada’s 12 primary dealers this week
showed five expect the bank to have raised rates at least once
by next March. [CA/POLL]

Based on a Reuters calculation, the market is pricing in a
97.64 percent chance that rates will remain on hold at the
central bank’s Dec. 7 decision (BOCWATCH: ).

Separately, Canada’s monthly budget deficit rose in August
from a year earlier as government program expenses and
increased infrastructure spending outweighed a rise in
revenues. [ID:nTOE002170]
(With additional writing by Jeffrey Hodgson; editing by Rob
Wilson and Peter Galloway)

WRAPUP 2-Data shows Canada recovery intact, inflation muted