Consumer prices, driven primarily by a steady decline in the prices of energy products, specifically gasoline, fell by 0.8% year over year in August following declines of 0.9% in July and 0.3% in June.

Other contributors to this drop include the shelter component of the Consumer Price Index, which declined by 2.2% year over year primarily due to declines in house prices and in mortgage interest costs.

In addition, the steady appreciation over the past six months of the Canadian dollar versus the U.S. currency has put downward pressure on the prices of imported goods.

As has been the case for the past several months, food prices continued to exert significant upward pressure in the year over year change in headline inflation prices.

Although we can expect the overall inflation rate to continue to retreat over the next couple of months, the depressing effect of both lower energy prices and shelter costs will gradually dissipate.

In the case of energy prices, since hitting a low in December 2008 they have trended steadily higher. In August they were up almost 8% due to a 30% year-to-date increase in gasoline prices.

A weakening in housing demand also has been a major contributor to the 2.2% drop in shelter prices over the past year.

However, the pick up in housing demand since the beginning of the year will probably reverse this trend as we head into 2010.

Given that the Canadian dollar is unlikely to appreciate much farther versus the US dollar, it appears likely that import prices will start to steadily move higher heading into 2010.

Despite persisting high unemployment and a relatively low level of capacity utilization, inflationary pressure will probably increase gradually during the first half of 2010, owing to higher shelter costs and a gradual increase in import prices.