Canada's retail sales fall in January; slight rebound seen in February

By Promit Mukherjee

OTTAWA (Reuters) - Canada's retail sales contracted a little less than expected in January, weighed down by lower goods prices and sales of motor vehicle and parts, data showed on Friday.

Retail sales dropped by 0.3% in January after a 0.9% jump in December that was spurred by holiday season sales, Statistics Canada said.

Analysts polled by Reuters had forecast a 0.4% drop in retail sales in January.

A preliminary estimate of February's sales figure showed that sales were likely to increase by 0.1%, but this data is sourced only from half of the total respondents usually surveyed, Statscan said.

In volume terms, however, sales were up 0.2% in January.

"Today's data show that consumer spending is still struggling to grow in a higher interest rate world, but is not collapsing," Andrew Grantham, senior economist at CIBC, wrote in a note.

The Bank of Canada has kept its key overnight rate at a more than a two-decade high of 5% since last July in its effort to rein in high inflation. This has helped produce a sustained slowdown in consumer prices, with headline annual inflation slipping below 3% in January and February.

But the Canadian central bank has still not managed to bring headline inflation back to its 2% target and it has said underlying price pressures are still persistent, suggesting it is too early to cut interest rates.

CIBC's Grantham said he expected the first rate cut to occur in June.

Retail sales in January totaled C$66.38 billion ($48.93 billion), with a contraction in three of the nine sub-sectors, Statscan said.

Sales declined the most in the new cars and auto parts category, which registered a 2.4% drop and fell for the first time in five months. This sector contributes a quarter of the total sales.

Core retail sales, which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers, increased 0.4% for the second consecutive month. But food and beverages, the biggest contributor, contracted 0.9%.

Sales, however, in most other categories were up.

"Strong population growth is lending a helping hand (to sales)," Shelly Kaushik, an economist with BMO, said in a note.

($1 = 1.3567 Canadian dollars)

(Reporting by Promit Mukherjee and Dale Smith; Editing by Paul Simao)