OTTAWA, July 21 (Reuters) - Canadian retail sales posted their third healthy increase in a row in May, a sign of economic strength that could boost the case for the Bank of Canada to hike rates again this year.
Sales rose by 0.6 percent from April to hit a record C$48.91 billion ($38.82 billion), Statistics Canada said on Friday. The increase was much greater than the 0.2 percent advance forecast by analysts in a Reuters poll.
The central bank last week raised interest rates for the first time in nearly seven years, citing the need to look through soft inflation. It also vowed to wait for more economic data before committing to its next move.
Separately, Statscan said the annual inflation rate slowed to a 20-month low of 1.0 percent in June, well below the Bank of Canada's 2.0 percent target, although core measures showed signs of strength.
"The Bank of Canada hiked rates based on the outlook for growth ... and in my view the numbers today really speak to that principle," said Jimmy Jean, a senior economist at Desjardins, citing the retail data and the strength in core inflation.
"I think the Bank of Canada will be very satisfied with these numbers ... It keeps very alive and well the likelihood of a hike in October." The bank is expected to lift rates again in October as it charts a course of gradual tightening, according to a Reuters poll of primary dealers.
The Canadian dollar strengthened on the data, rising to C$1.2566 to the greenback, or 79.58 U.S. cents, up from C$1.2595, or 75.40 U.S. cents.
May's advance in retail trade was largely driven by a 2.4 percent increase in sales at motor vehicles and parts dealers.
The overall inflation rate - which matched the forecast of analysts in a Reuters poll - was the lowest since the 1.0 percent recorded in October 2015.
Gas prices fell 1.4 percent in the 12 months to June after increasing by 6.8 percent on an annual basis in May.
Two of the three measures of core inflation the Bank of Canada introduced last year posted gains. CPI common, which the central bank says is the best gauge of the economy's underperformance, edged up to 1.4 percent from 1.3 percent.
CPI median, which shows the median inflation rate across CPI components, rose to 1.6 percent from 1.5 percent while CPI trim, which excludes upside and downside outliers, stayed at 1.2 percent.
With additional reporting by Fergal Smith and Susan Taylor in Toronto; Editing by Andrea Ricci