The annual inflation rate was 3.4% in September, Statistics Canada reported today. That’s down from 3.5% one-year rate seen in August, and marks the first drop in headline inflation in six months.

Higher prices for energy and food were the key inflation drivers last month.

Core inflation, excluding volatile food and fuel items, remained tame in September at 1.7%, below the Bank of Canada’s 2% target.

Fuel was a major contributor to the increase in the Consumer Price Index seen in September. Gasoline prices jumped by more than 10 cents a litre in many parts of Canada as Hurricane Ike threatened oil infrastructure facilities in the Gulf of Mexico. Gasoline prices eased later in the month after the hurricane threat passed.

This easing is likely to continue, according to Dawn Desjardins, assistant chief economist at RBC Economics Research. “With crude oil prices plummeting and refinery capacity restored, gasoline prices are poised to move lower going forward.”

Food prices in the 12 months to September rose 5.6%, an increase from the 4.5% rise recorded in August.

Transportation costs rose by 4.7%, but that was lower than the 5.8% rate seen in August as lower prices were reported to buy and lease passenger vehicles.

Excluding gasoline, prices would have risen only 2.2% last month on an annual basis

Shelter costs also continued to increase in September, up 4.5%, mostly as a result of higher mortgage interest costs.

And students paid 4% more for tuition this year, although there was some relief from continued price declines for computers, video equipment and other electronic items.

The cost of buying or leasing a motor vehicle dropped by 9.3%. This was the largest drop since February 1956.

Homeowner replacement costs declined 1.8% as house price increases eased.

Prices for clothing and footwear slipped 1.3%.

On a month-to-month basis, the all-items consumer price index rose 0.2% from August.

Headline inflation is poised to continue trending down in the months to come despite the depreciation of the Canadian dollar, according to CIBC World Markets economist Krishen Rangasamy.

“We do not expect those currency effects to be large enough to prevent headline inflation from continuing its descent over the balance of the year.”

IE