Canada's inflation rate continued to slide in August, dipping one-tenth of a point to 1.2 per cent as most goods and services tracked by Statistics Canada fell or rose moderately compared with the same month last year.

The agency said the result returned the inflation rate to where it stood in May and equalled the lowest level in the consumer price index in more than two years.

The weakness in inflation was anticipated by economists — although the consensus was for the index to remain unchanged — and is typical of a weak economy where retailers and producers face soft demand.

Core rate 1.6%

Core inflation, which measures underlying price pressure and excludes volatile items such as gasoline, fell one-tenth of a point to 1.6 per cent and was comfortably below the Bank of Canada's two per cent target.

Despite bank governor Mark Carney's bias towards tightening the money supply, which he again re-stated last month, analysts say there is no pressure on Canada's central bank to raise interest rates over inflationary fears.

Bank of Montreal economist Robert Kavcic noted the results were a shade below expectations, with core inflation rate setting its coolest pace in just over a year and down from a recent high of 2.3 per cent set in February.

"With core inflation tracking well below the Bank of Canada's third-quarter forecast, the housing market softening and the Fed stepping harder on the monetary accelerator, rate hikes in Canada remain at least a year away," Kavcic wrote in a report to clients.

Further declines expected

Economist David Madani of Capital Economics suggested that core inflation may decline even further in the coming months as external and domestic risks dampen economic growth.

"With unemployment likely to rise as a result, we expect the Bank of Canada soon to drop all pretences about removing policy stimulus," Madani said.

"The economic slowdown underway in Canada, due to softening external demand and a slumping housing market, points to an increasing output gap and more disinflationary pressures."

On a month-to-month basis, prices rose slightly by 0.2 percentage points from July as gasoline prices rebounded by 2.7 per cent during the month.

That wasn't enough to push the annual rate higher, however, given that prices also rebounded last year at this time and increases on most goods and services were modest.

Food prices higher

The more significant movers pushing the annual rate higher were gasoline, passenger vehicles, which on average cost two per cent more than a year ago, meat, up 5.7 per cent, and homeowner replacement costs, which increased by 2.2 per cent.

Food overall was 2.2 per cent higher, a slight increase from July, but showing no signs as yet of the major bounce expected later this year in response to the drought in the southern U.S. states.

But natural gas fell 13.9 per cent, video equipment by 15.6 per cent, women's clothing by 3.4 per cent, furniture was down 3.0 per cent, and mortgage interest costs were 1.8 per cent lower.

With a jump of 4.6 per cent in August, gasoline prices were strong enough to push up the annual inflation rate in Quebec by one-tenth to 2.0 per cent, the highest in Canada. The gasoline price jump in Quebec was more than twice the national average, the agency said.

On a regional basis, inflation was highest in Quebec and lowest in New Brunswick, Ontario, Alberta and British Columbia, which all recorded an annual rate of one per cent.