Canada’s annual inflation rate in September fell to its lowest level in 2 ½ years, Statistics Canada reported today. A big drop in gasoline prices last month was the main reason.

The September inflation rate was just 0.7%, matching the rate reported in February and March of 2004. Inflation was 2.1% in August.

Gas prices fell by 18.7% last month.

“A drop of this magnitude has never been recorded since the introduction of gasoline to the CPI basket,” the federal agency said.

The effect of cheaper gas was so profound that consumer prices actually fell by 0.5% last month.

In a year-over-year basis, gasoline was 18.7% lower than it was in September 2005 in the aftermath of Hurricane Katrina.

The core inflation rate, which excludes the most volatile items like fresh fruit and energy, unexpectedly rose to 1.7%, up from August’s 1.5%.

Since the Bank of Canada’s calculation of core inflation ignores the impact of July’s GST cut, its core reading jumps to 2.2% – above its expectation of a 2.0% cent core rate.

Alberta again had the highest annual inflation rate among the provinces, at 3.7%. But most provinces reported rates under 1%.

P.E.I. and New Brunswick reported negative inflation rates.