Canadian inflation falls to lowest level in 56 years

Prices in Canada were 0.9 per cent lower in July than last year, marking the lowest annual inflation rate in 56 years last month, Statistics Canada announced Wednesday.

It was the second straight month that the consumer price index has dipped into negative territory, after dropping 0.3 per cent in June.

Much of the fall can be attributed to a 23.4 per cent decline in energy prices during the last year. When the figures from that volatile sector are discounted, core inflation actually rose 1.8 per cent during the month.

That's close to where the Bank of Canada would like it (it has set an inflation rate target of two per cent), and is down slightly from the 1.9 per cent rate posted in June.

In July, consumers paid 4.1 per cent less for gas and other fuels than they did the previous month, and 28.3 per cent less than they did last July.

"Regular unleaded gasoline prices at self-serviced stations averaged 97.4 cents per litre in July 2009 compared with a record high of 136.6 cents in July 2008," the agency noted.

Gas prices started to fall by the end of last summer, so the overall year-over-year inflation rate should turn positive later this year.

For that reason, economists say there is little concern that deflation - a broad-based and persistent decline in prices - is setting in Canada and threatening to further damage the economy. Still, BNN's Michael Kane says deflation is not a trend that economists want to continue.

"It's not a great thing for prices to come down. I know that sounds counterintuitive, because as consumers, we would like to have lower prices. But from an economic standpoint, economists have been telling me this morning this decline can be a damaging thing to the economy," Kane told CTV News Channel Wednesday morning.

A few other components tracked by Statistics Canada also experienced deflation in July. The cost of buying a new vehicle fell 4.3 per cent during July, a smaller decrease than in June (5.2 per cent), the costs of owning or renting a home prices fell two per cent, mortgage interest costs were 0.1 per cent lower, and clothing and footwear cost 2.1 per cent less than last July.

In contrast, shoppers are feeling the bite of higher prices at the grocery store. The cost of food increased by 5.0 per cent over July 2008 - making it the key contributor to inflationary pressure. But that hike was better than the 5.5 per cent increase recorded in June, and 6.4 per cent hike of May, suggesting that food price increases are slowing.

As well, car insurance rose 5.1 per cent last month, tempering the overall descent in the gas-price dominated transportation component.

Regionally, eight of Canada's provinces experienced negative inflation last month, with British Columbia heading the pack with a minus 1.6-per cent-reading. Saskatchewan was the only province with positive inflation at 0.9 per cent, while prices were flat in Manitoba.