"All of this would feed into a dovish Bank of Canada and Canadian dollar weakness," said Camilla Sutton, chief currency strategist at Scotiabank.
Statistics Canada said on Friday that lower gas prices helped push the annual inflation rate down to 0.5 percent in January from 0.8 percent in December, the lowest since the 0.1 percent recorded in October 2009.
The rate is less than the 0.7 percent predicted by market analysts and farther outside the Bank of Canada's target range of 1 to 3 percent, offering further proof that the central bank is under no pressure to raise interest rates.
The Bank of Canada's closely watched core rate, which excludes the prices of items such as energy, tobacco and some food, slipped to 1.0 percent from 1.1 percent in December.
Sutton also noted with concern that on a seasonally adjusted basis, prices fell 0.1 percent in January from December.
The 2.1 percent fall in seasonally adjusted retail sales in December from November was far larger than the 0.3 percent decline predicted by market operators and suggested already muted expectations for fourth quarter growth might be too optimistic.
The monthly fall in retail sales was the greatest since the 2.4 percent decline recorded in April 2010. Trade was pulled down by slumping new car sales and a weak Christmas shopping season. Year on year, sales were down 0.7 percent, the worst since October 2009.
Last month the Bank of Canada already cut its fourth quarter growth forecast to 1.0 percent from 2.5 percent. December growth is likely to be disappointing given poor manufacturing and wholesale and now retail trade. Statscan is to release December and fourth quarter gross domestic product data on March 1.
In volume terms, used for calculating real gross domestic product moves, retail sales fell 1.6 percent.
Sales by auto and parts dealers dropped by 6.4 percent Sales at electronics and appliance stores, which jumped in November as Apple rolled out its iPad mini, fell by 12.1 percent.
Last month the Bank of Canada already cut its forecast for fourth quarter growth to 1.0 percent from 2.5 percent. December growth is likely to be disappointing given poor manufacturing and wholesale and now retail trade. Statscan releases December and fourth quarter GDP data on March 1.
"Basically this combination of data just piles on what had already been a weak footing for the Canadian dollar. Both numbers came in below already weak expectations. Obviously the real eye-opener here was the retail sales result," BMO Capital Markets chief economist Doug Porter said.
"We had been looking for a decline, but nothing on the order of that. And of course December just happens to be the most important month of the year for retailers. So obviously what had been a so-so year for retailers ended with a thud in December."
The Canadian dollar softened to its weakest level in seven months on the data, touching C$1.0230 versus the U.S. dollar, or 97.75 U.S. cents. It was at C$1.0210, or 97.94 U.S. cents shortly before the data release and finished Thursday's North American session at C$1.087, or 98.16 U.S. cents.
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the data traders eliminated already small bets on a rate increase in late 2013.
(Additional reporting by Alastair Sharp, Andrea Hopkins and Solarina Ho in Toronto; Editing by Chizu Nomiyama)