Higher gasoline prices drove up Canada's annual inflation rate to 2.5 per cent in September, up sharply from 1.7 per cent the month before.

That's the country's highest inflation rate since May 2006, Statistics Canada said Friday.

Getting the inflation picture

To get the latest Consumer Price Index (CPI), Statistics Canada looks at the prices of about 600 commodities nationwide. Most prices are checked during monthly visits to major retailers. Other prices are checked by phone or through the internet. Nationally, about 650,000 prices are checked each year. Prices are weighted by their importance in the total budget, so a 10 per cent increase in rent would have a bigger impact on the CPI than a similar increase in bread. The CPI is based on a typical basket of commodities. The contents of that basket are updated every four to five years to reflect current consumer spending patterns.   The increase in the CPI determines increases in OAS and CPP payments.

Prices at the gas pumps were 12.7 per cent higher than they were in September of last year. That was because of a sudden drop in gas prices a year ago rather than any increase between August and September, Statistics Canada said.

The core rate of inflation, which excludes the most volatile items in the consumer price index, slipped to 2.0 per cent from 2.2 per cent in August. That's right on the Bank of Canada's target for core inflation and represents the lowest core rate in just over a year.

Higher mortgage interest costs also helped to drive up the year-over-year rise in the cost of living. That helped to push the cost of ownership up by 4.8 per cent in the past year. Homeowners' replacement costs rose by 5.2 per cent.

On a month-over-month basis, consumer prices rose by 0.2 per cent, mainly because of higher prices for women's clothing, new cars, and tuition fees — especially in Ontario.

That was partially offset by a drop in the cost of fresh fruit and vegetables in September.

BMO Capital Markets economist Douglas Porter said the run-up in the loonie against the U.S. dollar did not provide as much of a brake on rising prices as was first thought.

"Still, given that the currency really started to soar in the second half of last month, it may be early to downplay that potential driver — we still see core prices moderating meaningfully in the months ahead, especially if the red-hot housing market finally begins to cool a touch and retailers get with the parity program," he said.

TD Bank economist Ritu Sapra said the high loonie will eventually result in "tamer" consumer goods inflation.

"Also, Canadians are likely to put greater pressure on firms to pass along savings from the appreciation in the Canadian dollars, as media attention on this issue has increased significantly," she wrote in a commentary.

Alberta again had the country's highest inflation rate at 4.6 per cent. But that was the lowest increase in Alberta's consumer price index since the start of the year. An almost 30 per cent drop in Alberta's natural gas prices over the past year got most of the credit for the moderation in Alberta's inflation.

Alberta was one of four provinces to register inflation rates higher than the national average. The others were New Brunswick (2.9 per cent), Manitoba (2.8 per cent) and Saskatchewan (3.8 per cent).