Canadian consumer inflation plunged to a 1.2% annual rate in January, from 2% in December. That’s the smallest year-over-year increase in 20 months, Statistics Canada reported today.

January’s increase in the consumer price index was the smallest 12-month increase since May 2002, when it was 1%.

The January CPI reading is down markedly from the 2% rate recorded in December and is lower than the consensus of 1.4% rate expected by economists.

Economists call the big drop a statistical blip, but note that there’s certainly room for the Bank of Canada to cut interest rates on March 2.

Lower energy and car prices got much of the credit for holding the CPI in check. Gasoline costs were 2.5% cheaper than they were a year ago, while vehicle prices were down 0.8%.

Excluding energy, the price index’s drop was less dramatic, going from December’s 1.7% to January’s 1.5%.

The Bank of Canada’s stated goal is to keep the inflation rate between 1% and 3%. However, the bank uses the “core” rate, which excludes the eight most volatile components, as the basis for its policy decisions.

The “core” rate also fell substantially in January, down to 1.5% from December’s 2.2%. That’s the lowest core rate since last August.

That’s well below the central bank’s 2% target rate and gives the Bank plenty of room to proceed with a further cut in its key lending rate on March 2.

“Don’t take the plunge in Canada’s inflation rate in January for more than it really is — a big statistical quirk,” cautions TD Bank. Despite the big drop in the annual rate, the CPI registered a small 0.1% gain month over month, and core prices were flat. Still, TD says, “There was not even a smidgen of price pressure in today’s report.”

“After a string of four months where core inflation was at or above expectations, CPI finally came in below consensus, keeping the door wide open for at least one more rate cut by the Bank of Canada,” BMO Nesbitt Burns concludes.

“Progress on trimming inflation, along with economic growth that has disappointed leaves the door firmly open to additional interest rate relief,” agrees CIBC World Markets. “Expect a 25 bps cut on March 2. And further easing beyond that will likely be needed to counter the lagged impact of currency appreciation on Canada’s export sector.”