Canadian consumer prices fell by 0.8 per cent in the 12 months ending August 2009 — an improvement on the annual pace of –0.9 per cent in July but still below zero for the third straight month.

Though slightly better on a monthly basis, the decrease was due primarily to a 12-month drop of 21.2 per cent in gasoline prices, Statistics Canada said Thursday.

A driver buys gas in St. John's in June. Lower pump prices were a major factor in Canada's negative inflation rate in August. (CBC)

On average it cost $1.01 a litre to fill up in August, compared with $1.27 at the gas pumps in the same month in 2008.

But on a monthly basis, gasoline prices were actually 2.6 per cent higher in August than in July of this year.

The –0.9 per cent annual inflation rate for July was the lowest rate recorded since 1953.

Not deflation, economists argue

Excluding energy, the consumer price index rose 1.4 per cent between August 2008 and August 2009.

Economists do not believe Canada is experiencing deflation, a prolonged period of falling prices that can cause problems for the economy, because energy prices are the sole dominant factor in the decline.

Economists predict inflation will return to positive territory later in the fall because the world price for crude oil has recovered from the deep declines experienced late in 2008 and early in 2009.

"Given the comparisons to last year’s elevated gasoline levels, CPI will remain in negative territory until the fourth quarter," CIBC economist Krishen Rangasamy said in a research note.

The primary upward pressure on the CPI came from food prices, which increased four per cent between August 2008 and August 2009.

Regionally, the agency says eight provinces saw overall prices decline in August, with only Quebec and Saskatchewan bucking the trend.

With files from The Canadian Press