Canada’s annual inflation rate slipped to 0.7% in February, matching the rate set back in December 2001.

Statistics Canada said today that last month’s reading of the Consumer Price Index came in just below analysts’ expectations of a rise of 0.8%.

January’s CPI was 1.2%.

Lower gasoline prices played a large role in the slowdown. Prices at the pump were 5.8%l ower year-over-year.

Prices of cars, computers, and traveller accommodation also dropped from a year earlier.

Upward pressure came from new home prices, cigarettes, tuition fees, and insurance premiums for cars and homes.

On a monthly basis, consumer prices inched up just 0.2% in February from January. That’s the tenth consecutive month that the consumer price index has risen by 0.2% or less.

Core inflation, which is closely watched by the Bank of Canada, fell to an annual rate 1.1%. That’s down from January’s 1.5%, which in turn was a significant moderation from the previous month’s 2.2%.

The lack of inflationary pressure in the economy gives the Bank of Canada a free hand to drop interest rates further.

Many economists expect the central bank will announce its third rate cut of the year on April 13.

Bank of Montreal says that the big factor in the drop in the core rate was the price of automobiles which plummeted 1.9% in the month reflecting the re-introduction of incentives to help boost sales.

BMO says that there are reasons to expect these very low rates will not persist. “The impact of the auto incentives will likely be reversed at some point with an attendant upward impact on the annual rate. As well, the SARS crisis a year ago prompted various price cuts in retail and tourism-related areas that are not likely to be repeated in 2004. This will provide further upward pressure on the annual inflation rate,” it says.

TD Bank suggests, however, that Canada’s inflation picture is likely to remain as benign as it gets. “Core inflation is virtually guaranteed to remain below the Bank of Canada’s 2% target all year. The only real wild card is on the energy front. The increases in gasoline prices in March stand to add 0.2% to next month’s CPI if sustained, but crude oil prices are running at exceptionally high levels, and could pull back as the rest of the year unfolds.”

“There was not even a smidgen of pressure on consumer prices in today’s data, and although another rate cut is still not a slam-dunk, the odds that the Bank of Canada will move again on April 13th is increasing with every data release,” says TD.