Echoing a steep drop in U.S. inflation rates, falling gas prices between September and October led to the largest dive in Canada's inflation rate in nearly half a century.

Statistics Canada reported Friday that rate of increase in the cost of living fell about one per cent in October over September, the largest dip since 1959.

StatsCan said the decline was primarily due to falling prices at the pumps, which were 13.4 per cent higher in September than they were in October.

The agency said consumer prices rose by 3.4 per cent in September, but that rate had slowed to 2.6 per cent last month.

"Despite this slowdown, gasoline continued to be the primary upward contributor for transportation costs," the agency said in a report on its website.

While falling gas prices may be giving some relief to drivers, the agency also noted that they were significantly higher (by 13.3 per cent) last month over the same period the year before.

But the agency also noted that food prices rose sharply in October.

"Food prices continued to gain momentum, increasing 6.1 per cent in October, after a 5.6 per cent rise in September. This was the eighth consecutive month in which food prices accelerated," StatsCan said.

While falling prices can increase across-the-board purchasing power for families, experts warn that deflation can seriously harm an already fragile national economy.

The fear stems from concerns that consumers will hold off making purchases and wait for prices to decline further, which can cripple economic activity and freeze business investments.

According to some experts, deflationary periods also represent the death knell of a moribund economy.

"Typically the only way you get deflation is if you've had a massive recession that has high unemployment rates and a lot of economic slack, so the conditions in which you get deflation are certainly not welcome," said CIBC World Markets economist Avery Shenfeld.

However, before that happens, the Bank of Canada could slash interest rates and the federal government could kick-start capital investment projects in order to revive the economy.

According to StatsCan:

  • Food purchased in grocery stores was up 7.3 per cent higher.
  • Baked goods were up 14.2 per cent.
  • Staples such as bread rose 17.7 per cent.
  • Pasta was up 37.1 per cent in a year-over-year comparison.

Canadians didn't just pay more for food last month. Housing costs also hiked upwards. Mortgages were up in October by 7.2 per cent.

Other Statistics Canada figures released Friday note:

  • The cost of buying or leasing a vehicle fell nine per cent.
  • Computer equipment and supplies dropped 12 per cent.
  • Clothing and footwear fell 2.8 per cent.

The annual inflation rate fell in eight of the 10 provinces, with only Saskatchewan and Manitoba being the exceptions.

The agency also said the core inflation index remained at 1.7 per cent when energy and food prices were excluded. That's below the Bank of Canada's two per cent target.

With files from The Canadian Press