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Canada's inflation rate fell to 1.1 per cent in February, following a 1.5 per cent increase in January, as gas prices dropped 1.3 per cent from a year earlier. (CBC)

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 1.2 per cent from a year ago, a drop from the 1.4 per cent increase in February. Month-over-month, core inflation was up by 0.7 per cent.

Both were pleasant surprises for analysts, who were expecting a 1.0 per cent annual increase in Canada's inflation rate, and a 0.5 per cent monthly increase 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 late-afternoon trading, it was up 0.24 cents to 89.18 cents US.

'Don't be fooled'

Previous fears of continuing low inflation may be at an end, according to some bank economists.

"Don't be fooled," CIBC senior economist Peter Buchanan wrote in a research note, saying the recent trend in core inflation "means Canadians have likely seen the low point of inflation for a while."

He expects the rate of inflation to tick higher for the rest of the year, climbing closer to the Bank of Canada's target by the end of the year.

Jonathan Bendiner, an economist at TD, echoed that sentiment in a note, saying the rate of inflation will begin to climb as "a weaker loonie will filter through to consumer prices" and economic growth will absorb some of the slack in the economy that's kept inflation low.

Lower gas 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.