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UPDATE 1-Canada's annual inflation rate stays at just 0.1%, well below Bank of Canada target

(Adds analyst comment, details of release)

OTTAWA, Sept 16 (Reuters) - Canada’s annual inflation rate remained at 0.1% in August as rising food prices were offset by lower gasoline costs, Statistics Canada said on Wednesday, underlining how much damage the coronavirus outbreak has done.

Analysts in a Reuters poll had forecast the rate would rise to 0.4%, far below the Bank of Canada’s 2% target. The central bank has made clear rates will remain at record low levels for at least two more years.

“We still have the economy running well below capacity, the unemployment rate is still over 10%, so the Bank of Canada’s focus isn’t going to be on inflation for a while,” said Nathan Janzen, a senior Royal Bank of Canada economist.

Gas prices fell 11.1% in August on a year-over-year basis, following a 14.9% decrease in July. The prices for food and shelter - which together account for almost half of the overall index - rose by 1.8% and 1.5% respectively.

The three core measures of inflation were little changed. The common measure, which the central bank says is the best gauge of the economy’s underperformance, rose to 1.5% from 1.3%.

“It is still a story of there’s a lot of slack in the economy,” said Andrew Kelvin, chief Canada strategist at TD Securities. The Canadian dollar held onto earlier gains after the releases, trading at C$1.3164 to the U.S. dollar, or 76.0 U.S. cents.

The Bank of Canada said last week that it was still too soon to start talking about an exit from monetary stimulus and predicted the pace of recovery would start to slow.

“(The Bank) is still of the view that spare capacity and the pandemic shock will have lagging influences longer than a few months, so they will still be cautious,” said Derek Holt, vice president of capital markets economics at Scotiabank.

Additional reporting by Fergal Smith and Jeff Lewis in Toronto and Dale Smith in Ottawa; Editing by Chizu Nomiyama

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