By David Ljunggren
OTTAWA (Reuters) - Although Canadian inflation and retail sales data came in weaker than expected on Friday, market operators predicted the Bank of Canada still would raise interest rates again next week to keep a booming economy in check.
Statistics Canada said the annual inflation rate in September dipped to 2.2 percent from 2.8 percent as price pressures from gas and air travel eased. Analysts in a Reuters poll had forecast an annual rate of 2.7 percent.
September marked the eighth consecutive month that the overall inflation rate has exceeded the Bank of Canada's 2.0 percent target.
The central bank, which predicts inflation should move back down toward 2 percent by early 2019, will announce its next interest rate decision on Oct. 24 and markets are expecting a hike. The bank has lifted rates four times since July 2017.
"We always knew we were going to see headline CPI inflation trend back down towards 2 percent ... the hike next week is going to happen," said Andrew Kelvin, senior rates strategist at TD Securities.
Market expectations of an interest rate hike in October, as reflected in the overnight index swaps market, dipped slightly to 96.95 percent from 98.53 percent before the release of the inflation data.
"Beyond next week, we see two more hikes in the first half of 2019," said Paul Ferley, assistant chief economist at the Royal Bank of Canada.
Separately, Statscan said the value of Canadian retail trade unexpectedly fell by 0.1 percent in August, the second decline in three months, in part due to lower sales of gas and clothing. Analysts in a Reuters poll had forecast a 0.3 percent gain.
The Canadian dollar quickly sank after the release, dropping to a five-week low of C$1.3108 to the U.S. dollar, or 76.29 U.S. cents, down from C$1.3047, or 76.65 U.S. cents.
The central bank's three core inflation measures all fell, for the first time since November 2016. CPI common, which the bank says is the best gauge of the economy's underperformance, dipped to 1.9 percent from 2.0 percent in August.
Statscan showed gasoline prices had increased by 12.0 percent over September 2017, down from the 19.9 percent year-over-year jump in August. The cost of air transportation fell by 16.6 percent from a year earlier.
(Additional reporting by Fergal Smith and Nichola Saminather in Toronto; Editing by Bill Trott)