OTTAWA -- The economy showed signs of weakness at the end of last year and the beginning of this one as inflation in January slowed to its lowest level in more than three years and stingy holiday shoppers pinched December retail sales.
The disappointing economic news sent the Canadian dollar to an eight-month low, dropping by more than half a cent, before recovering some ground.
BMO chief economist Doug Porter called the inflation and retail reports two sides of the same coin.
"They both come from the same place and that's what was an underlying soft economic picture around the turn of the year," he said.
Statistics Canada said the consumer price index in January was up 0.5 per cent, the slowest pace since October 2009 and below economists' expectations of a 0.7 per cent increase.
Core inflation, which is watched by the Bank of Canada and excludes the most volatile items, was 1.0 per cent for January -- at the low end of the central bank's target range.
Porter suggested if inflation heads any lower it could spark talk of the central bank cutting interest rates.
"I don't believe they will, but there's going to be talk about that," said Porter, who does expect the bank will hold off on raising rates until the middle part of next year or even later.
Meanwhile, retail sales fell 2.1 per cent in December, breaking a streak of five consecutive monthly gains and posting the largest drop since April 2010. Economists had expected a decline of just 0.3 per cent.
Porter noted there were some special circumstances at play with November's "Black Friday" promotions grabbing some sales and weak department store sales.
Sales were down in every province.
Statistics Canada said retail sales were down in Manitoba in December, falling by 1.6 per cent to $1.38 billion from $1.40 billion in November. That boosted sales for the year to $16.7 billion, a 1.3-per-cent improvement from 2011's total of $16.4 billion. It was the province's third consecutive yearly increase, after it posted gains of 4.7 per cent in 2011 and 5.5 per cent in 2010.
The pace of inflation also slowed in January in Manitoba, although only marginally. Statistics Canada said the annual inflation rate here was 1.2 per cent, versus 1.3 per cent in December.
Despite the improvement, Manitoba still had the third highest annual inflation rate in the country in January behind Nova Scotia's 1.4 per cent and Prince Edward Island's 1.3 per cent.
Statistics Canada analyst Jeffrey Peter said a number of factors are contributing to the higher cost of living in Manitoba. For example, electricity prices last month were up 4.4 per cent from a year earlier, but down 1.4 per cent overall in Canada.
Similarly, the cost of purchasing a new passenger vehicle was up by one per cent here, and down by 0.8 per cent in Canada.
So even though the pace of inflation is still slowing in Manitoba, Peter said the slowdown has been more pronounced in some other provinces.
Excluding gasoline prices, which fell 1.8 per cent year-over-year, Canadian inflation increased 0.6 per cent after rising 0.8 per cent in December. Higher prices for food, up 1.1 per cent, helped offset the lower fuel prices.
The two reports saw the loonie fall for a fifth day, closing down 0.2 of a cent at 97.96 cents US after moving to an eight-month low of 97.51 cents US.
TD Bank economist Diana Petramala said with inflation well below the Bank of Canada's two per cent target, the central bank is likely to keep interest rates where they are through 2013.
-- The Canadian Press with files from Murray McNeill