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Buying vegetables at Luc Jasmin's veggie and fruit stand at Atwater Market in Montreal, January 19, 2012.

Christinne Muschi/Christinne Muschi/The Globe and

Inflation is finally slowing down with the rest of the Canadian economy.

Annual inflation eased in December to 2.3 per cent, Statistics Canada said Friday, down from 2.9 per cent a month earlier to the slowest pace in 10 months. The "core" rate, which strips out volatile items like energy, also slowed, to 1.9 per cent from 2.1 per cent, bringing it below the Bank of Canada's 2-per-cent target.

The slowdown could be an anomaly, since it reflects steeper-than-usual holiday discounting, cheaper gasoline prices that might not last if tensions rise in Iran, and deals on cars after auto makers found themselves with more inventory once supply-chain backups linked to Japan's natural disasters were cleared up. Still, with the economy set to be sluggish for most of the year and households swimming in debt, companies are finding it harder to pass costs on to consumers.

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For Bank of Canada Governor Mark Carney, who has held his main interest rate steady at 1 per cent for a record 15 months, the December inflation data back up his argument that higher commodity prices, and their effects on other goods and services, would prove temporary.

Mr. Carney and some fellow central bankers, such as U.S. Federal Reserve Board chairman Ben Bernanke, resisted tightening policy last year when oil and food costs were spiking – arguing that securing the recovery was more important than being precisely on target with inflation – while critics insisted they would stoke runaway price gains.

"These numbers validate [Mr. Carney's]emphasis on helping to sustain growth," said Paul Ferley, assistant chief economist at Royal Bank of Canada. "With the slack in the system, there's reason to think inflation will be kept fairly moderate."

The central bank's latest survey of businesses across the country shows that outside threats like the European debt crisis haven't spooked most executives enough for them to stop hiring or investing. However, it's clear that executives are bracing for a year in which sales will be too tepid for them to raise prices by much, even if another spike in commodities lifts their own costs.

The Bank of Canada survey, released Jan. 9, found companies believe their input costs will rise at the same pace this year as in 2011. Yet, it said, "firms generally cite weaker demand conditions or competitive pressures as the main factors restraining increases in output prices."

In December, prices for passenger vehicles and clothes fell on an annual basis, while the year-over-year differences in gas and food prices were less pronounced than in previous months.

Slower inflation will make it easier for Mr. Carney to keep interest rates on hold for longer to protect the economy. At the same time, the average annual gain in 2011 was 2.9 per cent – faster than in any year since the central bank started targeting inflation two decades earlier.

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Economists predicted the slower-than-anticipated December reading won't throw the bank's most recent forecast – for 1.7-per cent inflation at the end of 2012 – off course much, so there's still little reason for Mr. Carney to consider lowering interest rates to stimulate demand.

Indeed, on a monthly basis, consumer prices fell 0.6 per cent in December from November, and core prices fell 0.5 per cent. After adjusting for seasonal factors, though, the drop in total prices was 0.2 per cent, and core prices were essentially unchanged, Statistics Canada said.

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Economics/business writer

Jeremy has covered Canadian and international economics at The Globe and Mail since late 2009. More

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