Sept. 22 (Bloomberg) -- Canadian retailers unexpectedly posted lower sales in July, led by falling prices at gasoline stations, as consumers brought a two-month shopping spree to an end.

Sales dropped 0.6 percent from the prior month to C$34.2 billion ($32 billion), Statistics Canada said today in Ottawa. Economists expected a 0.7 percent increase in July, based on the median of 20 estimates compiled by Bloomberg.

The data suggest consumer spending is recovering slowly as the jobless rate rises and households retrench, after sales surged in May and June amid signs the country was emerging from its recession. The Bank of Canada has pledged to keep its overnight rate unchanged at a record low of 0.25 percent through June 2010 because of weak growth, unless the inflation outlook shifts.

This is a “horrible across-the-board report,” said Derek Holt, an economist at Scotia Capital in Toronto. “It may signal the release of pent-up demand from last fall is over with.”

The Canadian dollar pared earlier gains following the report. The currency was trading at C$1.0694 per U.S. dollar at 4:11 p.m. in Toronto, after trading as high as C$1.0661 earlier today. The currency has advanced 14 percent this year as a rally in commodities such as crude oil boosted the outlook for the country’s exports.

The yield on the overnight index swap due in 9 months, a security based on investor expectations of where the Bank of Canada’s rate will be at that point, fell to 0.33 percent today, from 0.36 percent yesterday.

Falling Prices

July’s decline was largely triggered by falling prices, tempering concern that consumers are reining in spending, analysts said. Excluding the effect of price changes, retail sales fell 0.1 percent in July, Statistics Canada said.

Retail sales had been rebounding from a two-year low of C$33.1 billion in December, when the country was in the early months of the recession. Sales had risen in five of the previous six months before today’s report, including gains of 1.1 percent in May and 1 percent in June, as consumer confidence rose.

A poll by Nanos Research released yesterday found Canadians who say they believe the economy will strengthen over the next six months now outnumber pessimists for the first time since November 2007.

Confidence Rising

Canadian consumer confidence in August rose to its highest since April 2008, according to a monthly index compiled by the Conference Board of Canada.

“One should expect stronger sales in August and September, as is suggested by fast rising consumer confidence,” Marco Lettieri, an economist at National Bank Financial in Montreal, said in a note to investors.

Prime Minister Stephen Harper said yesterday the country probably remains in recession because of “challenges” in the job market, even as recent signs of recovery have helped fuel rallies in the stock market and currency. Canada’s unemployment rate was 8.7 percent in August, the highest since January 1998.

The value of sales at gasoline stations fell 3.4 percent because of lower prices, the statistics agency said. That was partly offset by an advance in car sales. Sales at new car dealerships rose 0.2 percent in July, while sales of recreational vehicles, used cars and parts gained 0.1 percent, the report said.

Excluding the automotive sector, retail sales were down 0.8 percent. Economists anticipated a 0.1 percent gain, based on the median of 18 estimates. Statistics Canada revised the June gain in ex-auto retail sales to 1.1 percent from 1 percent.

Sales were down in five of eight major retail components tracked by Statistics Canada, with pharmacies and personal care stores leading gainers in July, according to the agency.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net.

Last Updated: September 22, 2009 16:33 EDT