By Julian Beltrame, The Canadian Press

OTTAWA - Consumer prices tumbled to their steepest one-month drop in nearly half a century last month, as sharply falling energy prices raised the spectre of economy-crippling deflation in Canada.

The October dive dropped the annual inflation rate to 2.6 per cent from the previous month's 3.4 per cent.

But on an unadjusted month-to-month basis -the real cost of a basket of goods measured by Statistics Canada - prices fell a full percentage point between September and October, the biggest drop since June 1959.

"Canadian deflation fears mount," Scotia Capital economist Karen Kordes headlined in her research note to clients Friday morning.

"While we were expecting headline inflation to decline in October as energy prices softened substantially during the month... the details show that almost every component fell, illustrating widespread discounting."

Inflation now appears to be following other indicators - from stock markets, to oil prices, to central bank interest rates to consumer confidence - in a race to the bottom as governments scramble to arrest the spiral that is plunging the world into a not-so-mild recession.

In this climate of uncertainty, anecdotal evidence is building that consumers may be delaying purchases out of fear or because they think prices will continue to fall, says Bruce Cran of the Consumers' Association of Canada.

"We're hearing that people are trying to be as avaricious as they can in looking for the best bargains they can find," he said. "But until trust is re-established in terms consumers can understand, there's not going to be a lot of buying anyway."

The big item influencing the inflation index, as has been the case for most of the year, was the price of gasoline, which saw an overall drop of 13.4 per cent last month from September.

Gas prices remained 13.3 per cent higher than they were last October, and have since fallen sharply again to under 80 cents a litre in many markets, indicating that the inflation rate is likely to take another tumble, noted BMO deputy chief economist Douglas Porter.

But the slide went far beyond energy prices. With the exception of food prices, most other components that go into measuring the cost of living in Canada showed a sharp decline in growth or outright price chopping.

Neither is Canada the only country where deflationary concerns have emerged. The United States reported Thursday that its inflation rate fell a full percentage point on an annualized basis in October.

Still, Porter says deflation is less likely in Canada than in the rest of the world, where economies appear to be braking faster. As well, he said the falling Canadian dollar, down more than 20 per cent from last year's levels, will act as a check against outright deflation as prices for imports rise.

The Canadian dollar, which fell 2.52 cents Thursday, closed at 78.30 cents U.S., up 0.99 of a cent, on Friday.

Economists fear deflation because consumers and businesses are more likely to delay purchases hoping that prices will fall further, slowing economic activity and business investments.

But more importantly, CIBC World Markets economist Avery Shenfeld said deflation often appears as the final nail in the coffin of a dying 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," he explained.

Most economists believe long before Canada falls into deflation, the Bank of Canada and federal and provincial governments will intervene to stoke the economy through deeper interest rate cuts and ramped-up stimulus spending.

Bank of Canada governor Mark Carney hinted this week he is preparing to cut interest rates next month, and Porter says the consensus is growing that it will be a big half-point reduction bringing the trendsetting rate down to 1.75 per cent.

Ottawa has also suggested it may introduce a stimulus package, including accelerating construction projects, in the coming months.

October's figures showed a widespread retreat in price rises, with the exception of food. Overall, food prices were 6.1 per cent higher in October than last year, Statistics Canada said.

In detail, food purchased in grocery stores was 7.3 per cent higher, and baked goods were up 14.2 per cent. Staples such as bread rose 17.7 per cent and pasta was up 37.1 per cent year-over-year.

Canadians also paid more for housing in October, as mortgage interest costs rose 7.2 per cent, shelter expenses were up 3.8 per cent and property taxes rose 3.2 per cent. But with the exception of property taxes, the October increases in the housing component was lower than the previous month.

In many other cases, Canadians saw prices chopped in October, particularly in discretionary goods where purchases can be postponed.

The cost of buying or leasing a vehicle fell nine per cent, computer equipment and supplies dropped 12 per cent and clothing and footwear slipped 2.8 per cent. Furniture and auto insurance were also lower.

Here's what happened in the provinces and territories. (Previous month in brackets):

-Newfoundland and Labrador 3.5 (4.6)

-Prince Edward Island 3.9 (5.5)

-Nova Scotia 3.4 (4.2)

-New Brunswick 1.8 (2.4)

-Quebec 2.3 (3.2)

-Ontario 2.5 (3.7)

-Manitoba 3.0 (3.0)

-Saskatchewan 3.5 (3.4)

-Alberta 2.4 (2.8)

-British Columbia 2.5 (3.3)

-Whitehorse, Yukon 4.1 (3.6)

-Yellowknife, N.W.T. 4.7 (5.0)

-Iqaluit, Nunavut 2.8 (2.6)

The annual inflation rate was 2.6 per cent in October, says Statistics Canada. The agency also released rates for major cities, but cautioned that figures may fluctuate widely because they are based on small statistical samples (Previous month in brackets):

-St. John's, N.L., 3.5 (4.6)

-Charlottetown-Summerside, 3.9 (5.2)

-Halifax, 3.1 (3.7)

-Saint John, N.B., 1.9 (2.2)

-Quebec, 2.3 (3.1)

-Montreal 2.3 (3.1)

-Ottawa 2.6 (3.7)

-Toronto 2.7 (3.7)

-Thunder Bay, Ont., 2.8 (3.6)

-Winnipeg, 3.0 (3.0)

-Regina 3.8 (3.7)

-Saskatoon 3.4 (3.4)

-Edmonton 2.5 (2.7)

-Calgary 2.6 (3.2)

-Vancouver 2.7 (3.5)

-Victoria 2.6 (2.9)