By David Ljunggren
OTTAWA, March 22 (Reuters) - Canada's annual inflation rate in February jumped to a three-year high while January retail sales put in another disappointing performance, giving the Bank of Canada room to ponder when next to hike interest rates.
The annual inflation rate rose to 2.2 percent from 1.7 percent in January, the highest since the 2.4 percent seen in October 2014, in part due to costlier gasoline, Statistics Canada said on Friday.
The Bank of Canada, which has a 2.0 percent target for inflation, has raised interest rates three times since July 2017 amid a strengthening economy and near record low unemployment, and markets expect another hike by this July.
The central bank says it is keeping a very close eye on economic data, a stance that underlines the importance of a relatively weak 0.3 percent increase in January retail sales. Analysts had expected a 1.1 percent surge after the 0.8 percent drop in December.
"The Bank has got a bit of a conundrum here. There is no doubt the inflation numbers are quite a bit stronger than I'd expected ... the caveat however is you've got very soft growth indicators," said Derek Holt, head of capital markets economics at Scotiabank.
The Canadian dollar rallied on the inflation data, rising to C$1.2840 to the U.S. dollar, or 77.88 U.S. cents.
Among the main contributors to the higher annual rate in February were a 12.6 percent jump in gasoline prices and a 4.0 percent increase in food purchased from restaurants.
The Bank of Canada's three measures of core inflation also all strengthened. CPI common, which the central bank says is the best gauge of the economy's underperformance, increased to 1.9 percent, the highest since February 2012.
CPI median, which shows the median inflation rate across CPI components, rose to 2.1 percent, while CPI trim, which excludes upside and downside outliers, also edged up to 2.1 percent.
"It's not like inflation is at a worrisome level, but it also can't be used as a reason for outright caution by the Bank of Canada," said Doug Porter, chief economist at BMO Capital Markets.
Retail sales increased in seven of 11 subsectors, representing 63 percent of retail trade. In volume terms, sales edged up 0.1 percent.
Sales at electronics and appliance stores, which had slumped 8.0 percent in December, recovered partially in January, rising by 4.0 percent.
(Additional reporting by Susan Taylor and Fergal Smith in Toronto; Editing by Bernadette Baum)