Canada’s annual inflation rate eased to 2.6% in October, down from the 12-month increase of 3.4% seen in September.

October’s consumer price slowdown was primarily a result of slower price increases for gasoline, but prices for food exerted stronger upward pressure on consumer prices, Statistics Canada said Friday.

The 12-month inflation rate seen for October was less than the 3.1% annual increase that economists had forecast.

It was the largest monthly decline in prices since June 1959, according to Dawn Desjardins, assistant chief economist at RBC Economics Research.

Friday’s report clears the Bank of Canada to keep reducing interest rates without fear of fuelling inflation.

Economists at CIBC World Markets expect a cut of 50 basis points in the overnight target at the next rate setting date.

For the month of October alone, consumer prices eased by 0.5% on a seasonally adjusted basis.

Gasoline prices were a big factor in both the 12-month inflation rate and the one-month rate. From October 2007 to October 2008, gasoline prices increased 13.3% — compared with a 12-month change of 26.5% in September.

However, in October alone, gasoline prices fell 13.4%, as worries over a global economic downturn sent energy prices sharply lower.

With gas prices staging a further retreat so far this month, inflation will likely fall below the Bank of Canada’s 2% target in November, according to CIBC World Markets economist Avery Shenfeld.

“Depending on how long it takes crude to set a floor and begin to recover, we can’t rule out seeing an isolated month or two with a negative CPI,” Shenfeld said.

The Bank of Canada’s core rate of inflation, which factors out several volatile components, advanced 1.7% over the 12 months to October, identical to the rate posted in the previous two periods.

The seasonally adjusted monthly core index posted no growth from September to October, after increasing 0.2% from August to September.

IE