The annual inflation rate in Canada dropped to 2.9 percent last month, representing a sharp slowdown in price growth compared to what forecasters had expected.

The Consumer Price Index report issued by Statistics Canada on Tuesday explained that the biggest contributor to this decline was the year-on-year drop in gasoline prices, and the annual inflation rate was 3.4 percent last December.

Tuesday's report offered some good news for consumers as price growth slowed in five out of eight components of the Consumer Price Index, including food.

Grocery prices rose by 3.4 percent annually in January compared to 4.7 percent in December.

There are also positive signals for the Bank of Canada, as the latest figures show a decline in core price pressures and the main rate falling back to the central bank's target range of between 1 to 2 percent.

Core inflation measures for the central bank, which exclude price volatility, also declined in January.

On a seasonally adjusted monthly basis, prices fell in January for the first time since May 2020.

The half-point drop in the main inflation rate comes after a period of price growth fluctuations, increasing uncertainty about the timing of interest rate cuts.

The central bank, which kept the key interest rate at five percent, recently indicated that its next step is likely to be a rate cut.

But before it can pull this trigger, the Bank of Canada was clear that it needs more evidence that inflation is heading back to its 2 percent target.