OTTAWA - A drop in Canadian retail sales in August and cooler-than-anticipated annual inflation in September reinforced speculation the Bank of Canada may lower interest rates again, after the bank acknowledged this week it had considered cutting.

Statistics Canada said on Friday retail sales fell 0.1 per cent, missing expectations for a 0.3 per cent gain. Volumes fell 0.3 per cent.

The weak retail performance in the first two months of the third quarter could mean there is somewhat less buoyancy to the expected economic rebound. Analysts expect growth picked up in the third quarter after wildfires in Alberta caused a contraction in the second quarter.

Economists had anticipated retail sales would be supported by the new child benefit checks that families began receiving in July, but the figures suggested consumers may be choosing to save or pay off debt for now.

"This is exactly when the much-ballyhooed child benefit effect should be kicking in in a big way," said Doug Porter, chief economist at BMO Capital Markets. "If it is not showing up here, it's not going show up anywhere."

The annual inflation rate rose to 1.3 per cent in September, shy of forecasts for an increase to 1.5 per cent, as food prices saw their smallest gain since 2000.

Economists said the disappointing figures were likely to keep talk of a rate cut alive. The central bank left interest rates at 0.5 per cent earlier this week, but downgraded its economic outlook and said it had considered cutting for the second time in three years.

Avery Shenfeld, chief economist at CIBC Capital Markets, said the door for a rate cut that the central bank had opened got a tad wider with the day's data, though he noted it would take more data for the bank to move off the sidelines.

“After the Bank of Canada lit the flame with talk that it ‘actively’ considered cutting rates this week, today’s pair of key data releases will simply fan the fire,” wrote BMO Capital Markets chief economist Doug Porter in a note to clients.

The Canadian dollar weakened to a one-week low against the greenback following the data.

Retail sales declined in seven of 11 sectors in August, accounting for 57 per cent of retail trade, led by lower sales of new and used cars and a decline in purchases at general merchandise stores.

Annual core inflation, which strips out volatile items and is watched by the central bank, held at 1.8 per cent in September, as expected.

Food prices rose 0.1 per cent from a year ago, marking the smallest annual gain since February 2000. The cost of fresh vegetables fell for the first time since January 2013.

Here's a provincial breakdown of September's inflation rates, with the previous month's rates in brackets: 

  • Newfoundland and Labrador: 3.8 per cent (3.0)
  • Prince Edward Island: 0.9 (0.4)
  • Nova Scotia: 1.6 (0.9)
  • New Brunswick: 3.0 (2.2)
  • Quebec: 0.6 (0.1)
  • Ontario: 1.8 (1.5)
  • Manitoba: 1.3 (1.1)
  • Saskatchewan: 1.1 (0.7)
  • Alberta: 0.5 (0.7)
  • British Columbia: 1.8 (2.0)
  • Whitehorse, Yukon: 0.2 (0.3)
  • Yellowknife, N.W.T.: 0.5 (0.4)
  • Iqaluit, Nunavut: 2.3 (3.0)