Overall inflation in Canada slowed to an eight-month low in August and the core rate targeted by the Bank of Canada also eased, likely comforting the central bank after recent debt market turmoil led it cancel plans to raise interest rates.

Weaker gasoline prices unexpectedly knocked the annual inflation rate in August to 1.7 percent from 2.2 percent in July. The consumer price index fell 0.3 percent on the month.

Core inflation -- which strips out eight volatile items such as gasoline and some fresh produce -- declined to 2.2 percent in August from July's 2.3 percent. But the core rate stayed above the central bank's 2 percent target as it has for the past 12 months.

"Overall, I thought it was a pretty benign report," said Doug Porter, deputy chief economist at BMO Capital Markets.

"Given a very favorable year-ago comparison, next month it looks as if core inflation could test the 2 percent level, possibly even get below it."

The report likely makes the Bank of Canada feel justified in its decision to back away from plans to hike rates earlier this month.

The bank held rates steady at 4.50 percent as the risk to the economy from the U.S. subprime mortgage collapse overshadowed inflation fears.

"Today's CPI report will likely lead markets to pare back their Bank of Canada overnight rate expectations," said Jacqui Douglas, economics strategist at TD Securities.

The Canadian dollar's push to parity with the U.S. dollar slowed on Wednesday. Overnight, the currency had topped 99 U.S. cents on the U.S. Federal Reserve's aggressive 50-point rate cuts on Tuesday.

The currency was at 1.0151 to the U.S. dollar, or 98.51 U.S. cents, at midmorning on Wednesday, compared with Tuesday's close of C$1.0138 to the U.S. dollar, or 98.64 U.S. cents.

Canadian bonds followed U.S. treasuries lower.

The soaring currency may be another incentive for the Bank of Canada to sit on the sidelines on rates, or even cut rates in October or December, some analysts say.

"I still believe that rate cuts are a long shot, but at the very least you can say the inflation environment is likely benign enough that if there was the need the bank would feel a little more comfortable cutting rates if they had to," said Doug Porter, deputy chief economist at BMO Capital Markets.

Inflation pressures persist, however, and energy prices may rebound in September, pushing consumer prices back up again.

"Our forecast remains that the Bank of Canada will hold the policy rate at 4.5 percent in the near term with an eye to tightening policy once the risks from financial market stress have abated," said Dawn Desjardins, senior economist at RBC Financial.

Inflation remains on the central bank's radar. It said earlier this month it judges the economy to be running at above capacity. In the housing sector, which it flagged as a risk to its inflation outlook, mortgage interest costs rose by 6.1 percent in the year to August and the homeowners' replacement cost rose 6 percent.

Hourly wages rose 4 percent in the year to August, the biggest increase since 2001. The economy continued to add jobs last month at a robust pace and housing prices continued to climb in July.

Canada Inflation