By Paul Vieira

OTTAWA -- Canada's annual inflation rate rose in December at a slower-than-anticipated pace as higher gasoline and electricity costs were offset by a third straight month of food-price declines.

The tepid inflation reading reinforces a belief the Bank of Canada will remain on hold in terms of rate policy for the foreseeable future, and possibly consider another rate cut should downside risks -- tied to uncertainty over U.S. trade policy -- emerge.

The all-items consumer-price index in December rose 1.5% from a year earlier, Statistics Canada said Friday, compared with a 1.2% increase in November and a 1.5% advance in October. Market expectations were for a 1.7% advance in December, according to economists at Royal Bank of Canada.

On a month-over-month basis, headline consumer prices fell 0.2% in December.

Annual growth in Canada's underlying, or core, rate of inflation rose in a range from 1.4% to 2.0%.

The Bank of Canada said this week that inflation has been lower than anticipated, largely due to declines in food prices. The three new measures of core inflation, introduced with November's data, indicate that "material" excess capacity remains in the economy. The central bank sets interest-rate policy to reach and maintain 2% inflation. Bank of Canada said it expects inflation to move closer to its 2% target in 2017, with upward pressure on energy prices offset by lower food prices and excess economic slack.

As for Statistics Canada's three gauges of core inflation, CPI-common, which tracks common price changes across categories, rose 1.4% on a 12-month basis in December, versus a 1.3% gain in the previous month; CPI-median, which reports year-over-year price changes for consumer products that were in the middle of the pack, climbed 2%, or unchanged from the previous month; and CPI-trim, which attempts to show the average rate of inflation after "trimming" goods at both the high and low end of price gains, advanced 1.6%, also unchanged from the previous month.

Mark Chandler, head of foreign-exchange and fixed-income research at RBC Capital Markets, said core inflation moved up a notch based on an average of the three new measures.

"At the margin inflation is slightly firmer, but given the dovish nature of the Bank of Canada, the impact of this report will be very marginal," he said.

In terms of total inflation, seven of the eight categories posted annual gains, led by a 5.5% jump in gasoline prices. The pop in pump prices follows a 1.7% drop in the previous month.

Also lifting CPI were a 2.6% gain in automobile prices, and a 3.6% advance in electricity costs.

Those gains were offset by a 1.3% year-over-year decline in December in the price of food. The last time food prices fell for three consecutive months on an annual basis was the early 1990s. The data agency said food purchased at grocery stores declined 2.8% on lower vegetable and fruit prices. In contrast, food purchased at restaurants rose 2.3%.

On a seasonally adjusted monthly basis, Canadian prices climbed 0.3% in December after a 0.1% decline in the previous month, the data agency said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

January 20, 2017 09:10 ET (14:10 GMT)

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