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OTTAWA (Reuters) - Consumer prices in Canada fell at the steepest rate in 56 years in July due to a sharp decline in energy costs, but analysts said on Wednesday there was little risk of prolonged deflation.
Overall prices dropped 0.9 percent year-on-year in July, according to Statistics Canada, reflecting a 23.4 percent swoon in energy prices. The drop largely reflected a 28.3 percent decline in gasoline prices from July 2008, a trend that analysts said would soon reverse.
Economists had expected a 0.8 percent decline in overall prices in July from July 2008. The actual figure -- the steepest drop since the 1.4 percent fall recorded in July 1953 -- is far weaker than the Bank of Canada's target range of around 2 percent annual inflation.
"The year-ago comparison (on energy prices) has become much less favorable going forward, so we will see the headline rate of inflation move back to positive territory by the end of the year," said BMO Capital Markets senior economist Sal Guatieri.
Analysts, one of whom referred to "this yawner of an inflation report," said the annual overall inflation rate excluding energy rose 1.8 percent in the 12 months to July.
The core annual inflation rate -- closely watched by the Bank of Canada -- dropped to 1.8 percent from 1.9 percent in June. The rate excludes the cost of volatile components such as fruit, vegetables, natural gas, fuel oil and gasoline.
"There is likely a greater emphasis on the core reading than the headline, given the distortion created by the picture on petrol ... the narrowness of the story does not suggest that Canada is experiencing broad-based deflation," said HSBC Securities economist Stewart Hall.
"Nor is there a palpable concern for an inflationary spiral given the great amount of excess capacity sloshing around in an economy that is barely operating at three-quarter speed."
The central bank has promised to keep its benchmark interest rate at a record low of 0.25 percent through June 2010, conditional on inflation staying under control.
"Unless there is a drastic change in inflation, monetary policy settings are likely to remain unchanged for now," said Charmaine Buskas, an economics strategist at TD Securities.
Consumer prices fell by 0.3 percent in July from June, while the core rate was unchanged over the same period.
Canada went through a recession from April 1953 to April 1954, virtually the same period as a similar downturn in the United States in the wake of the Korean War.
A Statscan analyst said agency data, although less detailed than the figures calculated today, showed the main reason for the 1.4 percent year-on-year-decline in July 1953 was downward pressure on the prices of food items, cigarettes and alcohol.
The Canadian dollar moved slightly higher immediately after Wednesday's data and climbed steadily after the release of stronger-than-expected figures for Canada's July composite leading indicator.
By 2.20 p.m. (1820 GMT) the Canadian dollar was at C$1.0954 to the U.S. dollar (91.29 U.S. cents), compared with C$1.1092 (90.16 U.S. cents) before the inflation data came out.
The leading indicator rose by 0.4 percent in July from June on strong performances by the housing sector and the stock market. The increase -- the first monthly advance since August 2008 -- was greater than the 0.2 percent rise predicted by market operators.
Six of the 10 components expanded in July, the most since May 2008.
Additional reporting by Scott Anderson, Ka Yan Ng and Andrea Hopkins; Editing by Frank McGurty