Canada's annual inflation rate slid to the lowest level in 56 years last month, dropping more than expected for the second straight month to set overall prices 0.9 per cent lower than last year, Statistics Canada reported Wednesday.

The fall on a month-to-month basis was even more dramatic, as prices in July fell 0.3 per cent from the previous month, reversing the similar monthly increase registered in June.

Still, economists say there is little concern that deflation - a broadbased and persistent decline in prices that could inflict further damage on the economy - is setting in in Canada, as it did in Japan during the 1990s.

That's because only three of the major components tracked by Statistics Canada are experiencing deflation and most of that is based on falling gasoline prices.

In July, consumers paid 4.1 per cent less at the pump than they did the previous month, and 28.3 per cent less than they did last July.

"Regular unleaded gasoline prices at self-service stations averaged 97.4 cents per litre in July 2009 compared with a record high of just under $1.37 in July 2008," the agency noted.

But analysts expect the impact of gas prices on inflation is due to reverse next month, which could cause the current deflationary trend to reverse course. The influence of gas prices has mirrored the downward spiral in oil prices, which peaked at US$147 a barrel last July before plunging over the following year.

"We don't have a deflation or an inflation problem in Canada," said Meny Grauman, an economist with CIBC World Markets.

Statistics Canada also pointed out that excluding the energy component, inflation remains a healthy 1.8 per cent in Canada. Core inflation is also close to where the Bank of Canada would like it, at 1.8 per cent, only slightly below the desired two-per-cent target.

Scotiabank economist Adrienne Warren predicted the July number will be the low point of the cycle and that annual inflation will return to positive territory in October.

Although most consumers would welcome widespread price decreases, economists say a prolonged deflationary cycle could have the effect of further undermining activity if consumers and businesses decide to hold off spending in hopes of realizing bigger savings in the future.

Still, Canadians were seeing many bargains when they went shopping last month.

Besides lower pump prices, the cost of purchasing a car was 4.3 per cent lower than last year, shelter prices fell two per cent, mortgage interest costs were 0.1 per cent lower, and clothing and footwear cost 2.1 per cent less than last July.

The key contributor to inflationary pressure continued to be food prices, which were five per cent higher in July on an annual basis.

But Warren noted the year-long strong buildup of food prices also appears to be slowing and will likely result in inflationary pressures being kept in check even after the impact of gas prices has worn off.

Food prices had risen 5.5 per cent in June, and 6.4 per cent in May.

"There is some evidence now that there's a market share price competition among the major grocery store chains, and consumers are a little more price conscious," she said.

As well, car insurance rose 5.1 per cent last month, tempering the overall descent in the gas-price dominated transportation component.

Regionally, eight provinces experienced negative inflation last month, with British Columbia heading the pack with a minus 1.6-per cent reading.

Saskatchewan was the only province with positive inflation, at 0.9 per cent, while prices were flat in Manitoba.