OTTAWA - Canadian inflation remained tame in December, taking the steam out of the loonie's recent surge and giving the Bank of Canada even less reason to move off historically low interest rates.

Statistics Canada said annual inflation rate ticked up to 1.3 per cent in December -- three-tenths of a point less than expectations -- but, if anything, even that low figure exaggerates the upward pressure on prices.

The more important number, say economists, is that consumer prices actually slid 0.3 per cent in December from November and that core inflation, which excludes the volatile energy component, remained a tame 1.5 per cent -- below the central bank's target of two per cent.

"There are two big factors at play -- the underlying weakness of the economy means businesses can't raise prices and the other big factor is the renewed strength of the Canadian dollar which is quashing import prices," said Douglas Porter, deputy chief economist with BMO Capital Markets.

The surprisingly low inflation rate helped drive down the value of the Canadian dollar to 95.43 cents US, down about 1.6 cent from Tuesday's close of 97.02. That was the biggest one-day slid for the loonie since October.

Porter said the loonie fell one cent just after the inflation number was released at 7 a.m.

Money markets downgraded the dollar in part because the lack of upward inflationary pressures makes it even less likely the Bank of Canada will raise interest rates any time soon.

On Tuesday, the central bank kept its trendsetting overnight rate at the historic low of 0.25 and pledged to keep there until after June, but some economists speculate it may remain at the so-called lower bound until the fourth quarter of 2010.

The central bank had earlier warned about low interest rates triggering a housing bubble, which could drive up inflation, but did not mention home prices in Tuesday's statement.

What little inflation exists in Canada at the moment, the increase registered in the last three months of 2009 was all about gasoline prices, and more precisely, the low prices that prevailed in late 2008.

The cost of filling up at the pump was 25.6 per cent higher last month than December 2008, when oil was tumbling in the face of a global economic slowdown sparked by a credit crisis in the American banking and housing sectors.

Excluding the energy component in the consumer price index, annual inflation would have stood at a tame 0.4 per cent in December.

Despite a wild year for measuring fluctuations in consumer prices -- with prices mostly falling in the first nine months to below zero and rising in the last three -- Statistics Canada noted that 2009 was a overall remarkably stable, with the index moving up modest 0.3 per cent on average from 2008. The roller-coaster ride was mostly to do with energy, the agency pointed out.

"Energy prices exerted the most significant downward pressure on the CPI in 2009," the agency said. "Overall, prices for energy were 13.5 per cent lower in 2009. Gasoline prices fell 17.5 per cent in 2009, while prices for natural gas and fuel oil and other fuels dropped 20.1 per cent and 29.9 per cent, respectively."

It's been only in the last three months that the energy influence has reversed, and pushed the consumer price index higher.

But that influence will have a short life since gasoline prices began stabilizing at near current levels in early 2009.

Economists say when that happens, headline inflation will start to resemble the core index at about 1.5 per cent.

In December, six of the major components tracked by Statistics Canada recorded price increases, led by the energy-related transportation sector, which rose 4.7 per cent from the previous year.

Food prices were 1.7 per cent higher, household operations rose 1.9 per cent. Health and personal care, recreation, education and reading materials, and alcohol and tobacco also increased moderately.

But prices were 1.7 per cent lower on a year-to-year basis for shelter, as a result of lower heating costs and mortgage interest; clothing and footwear, and the cost of passenger vehicles, which are 3.3 per cent lower than a year ago.

Regionally, Statistics Canada said inflation was highest in the Atlantic provinces and lowest in the West.