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OTTAWA, Feb 23 (Reuters) - Canada's annual inflation rate cooled in January from a year earlier as consumers paid less for gasoline and vehicles, but firmer underlying prices were seen keeping the central bank on track to raise interest rates again later this year.
The annual inflation rate was 1.7 percent last month, Statistics Canada said on Friday, down from 1.9 percent in December but above economists' forecasts for 1.4 percent.
The Canadian dollar rallied against the greenback following the better-than-expected figures.
The Bank of Canada's three measures of core inflation were also less muted, with CPI common, which the central bank says is the best gauge of the economy's underperformance, rising to 1.8 percent, the highest since April 2012.
Taken together, the core measures averaged 1.8 percent. Economists said that should keep the Bank of Canada on a tightening path, though it has room to wait amid several uncertainties, including North American trade negotiations.
"There's still not a lot of evidence that inflation pressures are really getting out of hand in a way that would force the bank to hike more quickly than they've been planning to," said Nathan Janzen, senior economist at Royal Bank of Canada.
"At the same time, you are seeing the firming that's been expected, so that means the economy is probably still strong enough, in their view, to withstand further gradual rate hikes."
The bank has raised rates three times since July amid a strengthening economy and labor market, and has said it will be data-dependent in its approach from here.
Markets expect the bank to make no change at its next policymaking meeting in March but another rate hike is fully priced in by July.
Transportation costs rose 3.2 percent from a year ago, moderating from the previous month's pace as price gains for gasoline and autos decelerated.
But food prices were up 2.3 percent, the largest gain since April 2016, as Canadians paid more for food at restaurants as well as fresh fruits and vegetables.
Rounding out the three measures of core inflation, CPI median, which shows the median inflation rate across CPI components, held at 1.9 percent, while CPI trim, which excludes upside and downside outliers, was unchanged at 1.8 percent.
Prices in Ontario, Canada's most populous province, rose 1.8 percent, as consumers paid more at restaurants and for childcare and housekeeping services after the province raised its minimum wage at the start of 2018.
(Additional reporting by Susan Taylor in Toronto; Editing by Jeffrey Benkoe and Bernadette Baum)