* 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 (Reuters) - 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/] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 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] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
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
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)