By David Ljunggren
OTTAWA, July 21 (Reuters) - Canadian retail sales posted their third healthy increase in a row in May, a sign of strength that analysts said boosts the case for another rate hike this year despite data showing persistently weak inflation.
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 greater than the 0.2 percent advance forecast by analysts in a Reuters poll.
The Bank of Canada last week raised interest rates for the first time in nearly seven years. It also vowed to wait for more economic data before committing to its next move. Statscan said the annual inflation rate slowed to a 20-month low of 1.0 percent in June, well below the central bank'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, a Canadian brokerage.
"I think the Bank of Canada will be very satisfied ... it keeps very alive and well the likelihood of a hike in October."
The bank is expected to lift rates again in October, according to a Reuters poll of primary dealers. Canadian dollar strengthened, hitting C$1.2547 to the greenback, or 79.70 U.S. cents, up from C$1.2595, or 75.40 U.S. cents.
May's advance in retail trade was driven by a 2.4 percent increase in sales at motor vehicles and parts dealers.
"The better-than-expected performance of the Canadian economy ... should allow the Bank of Canada to follow through with another rate hike in October," said economist Dina Ignjatovic of TD Economics.
The overall inflation rate - which matched the forecast of analysts - 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, which the Bank of Canada introduced last year, posted gains.
Among those core inflation measures, CPI common, rose to 1.4 percent from 1.3 percent. The bank says this gauge is useful in assessing the economy's underperformance.
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.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic - Canada economic snapshot
http://tmsnrt.rs/2e8hNWV Graphic - Canada inflation, central bank rate:
http://link.reuters.com/cut67s
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (With additional reporting by Fergal Smith and Susan Taylor in Toronto; Editing by Andrea Ricci and W Simon)