Canada's annual rate of inflation for March came in at 1.2 per cent, down from the 1.4 per cent increase in February, Statistics Canada said Friday.

The March rate was slightly tamer than the 1.4 per cent annualized inflation rate that economists had been projecting.

A 6.2 per cent decline in transportation costs was the key factor in the drop in annual inflation, as year-over-year price drops were seen for gasoline, and the purchase and leasing of passenger vehicles.

Excluding gasoline, the annual rate of inflation came in at 2.4 per cent.

While Canadians paid less for gasoline and vehicles than they did a year ago, they paid more for food and shelter.

Food costs rose 7.9 per cent from March 2008 to March this year — the largest increase since November 1986.

Statistics Canada said large price increases were seen for fresh vegetables, which were up more than 26 per cent. The cost of fresh fruit was up 19.3 per cent, while costs for non-alcoholic beverages shot up more than 10 per cent, and cereal products were up 11 per cent.

Statistics Canada also pointed out there was a 12-month price increase of 54.9 per cent for potatoes, largely as a result of poor harvests in Canada that led to tighter supplies.

Shelter costs, the second-largest factor behind food costs, had a 12-month rate of growth of 2.1 per cent in March, after increasing three per cent in February. The annual change in the shelter costs has slowed since reaching a peak of 5.4 per cent in July 2008.

On a seasonally adjusted monthly basis, the consumer price index fell 0.3 per cent from February to March 2009, after increasing 0.4 per cent from January to February.

The Bank of Canada's core index — which it tracks for its interest-rate-setting policy — advanced two per cent over the 12 months to March. The core rate was right on the central bank's stated inflation target.

The seasonally adjusted one-month core index posted no growth from February to March, after increasing 0.4 per cent from January to February.

Some economists see the Bank of Canada holding interest rates steady when it announced its next decision on April 21, but expect the bank will lay out its plans to provide more stimulus to markets.

"Although the platforms will be announced, the [Bank of Canada] may well refrain from implementing their plan immediately as they assess whether the recent 'green shoots' of stability in markets and some parts of the economy will grow as a healthy dose of fiscal stimulus is applied," said Dawn Desjardins, assistant chief economist at RBC Economics Research.

TD Bank economist Diana Petramala said the latest inflation report could leave room for the Bank of Canada to cut interest rates by a quarter of a percentage point next week.

"While there are no signs that food price pressures will subside anytime soon, it is clear that the downward price pressures from every other good in the basket due to weakening domestic demand have begun to outweigh these rising costs," she said in a commentary.