03/21/2014 08:42 EDT | Updated 05/21/2014 05:59 EDT

Inflation slips to 1.1% in February as gas prices fall

Canada's annual inflation rate fell to 1.1 percent in February, down from a 1.5 per cent increase in January, Statistics Canada said Friday. On a month-to-month basis, however, prices rose 0.8 per cent from January.

The measure is well below the Bank of Canada's target of two per cent, meaning an interest rate hike remains far away.

Bank of Canada governor Stephen Poloz said in September the inflation rate will be the key focus of the central bank's policy.

Core inflation, which strips out volatile products such as food and energy, rose just 0.7 per cent from a year ago, a sharp drop from the 1.4 per cent increase in January.

Both were pleasant surprises for analysts, who were expecting a 1.0 per cent increase in Canada's inflation rate, and a 0.5 per cent rise in core inflation.

Combined with the release of better-than-expected retail sales in January, inflation news sent the Canadian dollar higher  against the U.S. currency. In early morning trading, it was up 0.34 cents to 89.29 cents US.

Lower gasoline prices

The decline in inflation was led primarily by a drop in the price of gasoline, which fell by 1.3 per cent over the past year, compared to a 4.6 per cent increase in January.

The price of food was up 1.1 per cent in February, matching the annual increase in January. Transportation costs, which led January's gain with a 2.0 per cent increase, were up by just 0.4 per cent.