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This article was published 20/2/2009 (4240 days ago), so information in it may no longer be current.

OTTAWA - Canada's inflation rate continued to slide toward zero last month as falling oil prices and waning consumer demand in the face of recession fears drove many prices lower, though food costs rose.

The annual inflation rate edged one-tenth of a point lower to 1.1 per cent in January bringing the rate to the lowest in two years. But measured on a month-to-month basis, prices actually fell 0.3 per cent from December, the fourth straight month in which prices have dropped.

'Inflation is now about as menacing to Canada as Luxembourg's navy," said the Bank of Montreal's deputy chief economist Douglas Porter.

'With the economic downturn gathering force and commodity prices still reeling, inflation is poised to move decisively lower in the months ahead. A temporary dip into negative inflation readings looms in the spring."

In December, Bank of Canada governor Mark Carney called the chances of deflation "remote," although he said prices are likely to contract temporarily in the second and third quarter of this year.

Porter said the risk of deflation - defined as a widespread and prolonged period of price drops - has risen somewhat because the global economy continues to weaken. But he agreed that deflation remains "unlikely," in part due to the lower Canada dollar making the cost of imports higher.

If there was a deflationary concern in the January report, it was that core inflation, which excludes volatile energy and many food prices, dipped half a point to 1.9 per cent.

But even there, Scotia Capital economist Derek Holt cautioned against getting "too carried away" since the sharp decline was narrowly confined on lower car prices.

'That said, a faster than expected deterioration in the economy and growing evidence that inflation is a dead issue should cement a 50-basis-point (half a percentage point) cut by the Bank of Canada on March 3rd," he added.

That would bring the central bank's trendsetting short-term interest rate to a record low 0.5 per cent.

While high inflation is regarded as undesirable, economists also fear that deflation can cause consumers and businesses to postpone spending in expectations of lower prices in the future, resulting in even slower economic growth.

Porter pointed to the ongoing difficulties in Japan, which first fell into a deflationary spiral in the 1990s, as an example how an extended period of falling prices can undermine an economy.

'Once it gets entrenched its very hard to get out of it because the mentality sets in that there's just no reason to go buy things since prices are just going to fall tomorrow," he explained.

The rising cost of food, up 7.3 per cent year over year, is now the key impediment to Canada's inflation rate falling to zero.

Excluding food, inflation is already there at negative 0.2 per cent. Even so, three provinces - Prince Edward Island, Nova Scotia and New Brunswick - experienced negative inflation in January.

Although gasoline prices rose slightly in January from the previous month, they remain a key driver of low annual inflation and remain 23.5 per cent lower than 12 months ago.

As well, transportation costs fell 7.5 per cent on an annual basis, purchasing or leasing a vehicle was 8.2 per cent lower than a year ago, and the price of clothing and footwear slipped 0.4 per cent.

But food continues to get more expensive as higher transportation and energy costs year over year raise cost pressures for food producers.

Statistics Canada said food costs rose 7.3 per cent overall, with the cost of purchasing food at grocery stores rising by 8.6 per cent.

Especially expensive were prices for fresh vegetables, up 19.9 per cent from a year ago, and bakery and cereal, up 10.5 per cent. The agency noted, however, that the increases were less than registered in December.

Other items to experience increases last month were car insurance premiums, natural gas, and shelter and mortgage interest costs.

Regionally, inflation was lowest in the Maritime provinces and highest in Saskatchewan, where it stood at 2.4 per cent.

- The annual inflation rate was 1.1 per cent in January, says Statistics Canada. Here's what happened in the provinces and territories. (Previous month in brackets):

-Newfoundland and Labrador 0.9 (1.2)

-Prince Edward Island -0.1 (0.0)

-Nova Scotia -0.1 (-0.2)

-New Brunswick -0.5 (-0.6)

-Quebec 0.5 (0.5)

-Ontario 1.4 (1.5)

-Manitoba 1.4 (1.9)

-Saskatchewan 2.4 (2.6)

-Alberta 1.2 (1.9)

-British Columbia 1.4 (1.2)

-Whitehorse, Yukon 2.4 (3.0)

-Yellowknife, N.W.T. 2.7 (3.1)

-Iqaluit, Nunavut 3.3 (3.4)

The annual inflation rate was 1.1 per cent in January, says Statistics Canada. The agency also released rates for major cities, but cautioned that figures may fluctuate widely because they are based on small statistical samples (Previous month in brackets):

-St. John's, N.L., 1.3 (1.6)

-Charlottetown-Summerside, 0.2 (0.2)

-Halifax, 0.2 (0.2)

-Saint John, N.B., -0.3 (-0.7)

-Quebec, 0.5 (0.5)

-Montreal 0.8 (0.7)

-Ottawa 1.7 (1.7)

-Toronto 1.6 (1.7)

-Thunder Bay, Ont., 1.5 (1.9)

-Winnipeg, 1.4 (2.0)

-Regina 2.9 (3.0)

-Saskatoon 2.4 (2.5)

-Edmonton 1.4 (2.0)

-Calgary 1.5 (1.5)

-Vancouver 1.6 (1.3)

-Victoria 1.5 (1.2)