Canada’s annual inflation rate dropped to 2.2% in January, down from 2.4% in December, Statistics Canada reported today.

It was the slowest pace since August 2007.

The core inflation rate, which excludes the most volatile items in the consumer price index, slipped by a 10th of a percentage point to 1.4% last month, StatsCan said. That is the lowest core reading since July 2005.

“Overall, Canadian inflation is still looking pretty soft, despite the upward pressure in January from food and gasoline prices,” said Jacqui Douglas, economics strategist at TD Securities. “But the Bank of Canada continues to use core CPI as its operational guide, since it’s considered to be the better predictor of total inflation, as Governor Carney confirmed in yesterday’s inaugural speech.”

For the fifth straight month, higher gasoline prices were the main reason for higher consumer prices, the government agency said. Pump prices were 20.9% higher than they were a year ago. Higher mortgage interest costs also played a role in putting upward pressure on inflation.

Lower car prices helped to keep a lid on the overall inflation rate. Vehicle prices in January were 4.9% lower than they were a year earlier, thanks to manufacturer discounts and the cut in GST, which dropped from six% to five% on Jan. 1.

Statistics Canada estimates that a one percentage point cut in the GST should cut the inflation rate by 0.6% “if the entire amount of the decrease were transferred to consumers through lower prices.”

But the agency said the impact would be less if businesses raised their margins or if some businesses — like car dealers — had already reduced their prices in anticipation of the GST cut.

On a province-by-province basis, Alberta still had the country’s highest inflation rate, at 3.6%. But that rate has been cooling steadily. British Columbia’s inflation rate was the country’s lowest — 0.8% — as gasoline prices in that province rose by just 6.1%.

“Expectations that the core inflation rate will remain low and that the trade sector will continue to constrain the pace of GDP growth in 2008 will keep the Bank in rate cut mode in the months ahead,” said RBC senior economist Dawn Desjardins, in a note.

She is expecting the overnight rate to be lowered by 50 basis points at the March 4 policy meeting, and further cuts to bring the rate to 3% by the middle of this year.

Separately, StatsCan said Canadian wholesalers reported a sharp decline in sales in December.

But the government agency noted that wholesalers put in another solid performance in 2007, despite the drop.

Sales fell 2.9% in December to $42.7 billion, ending a string of three straight monthly increases.

StatsCan said preliminary reports indicate wholesalers sold $520.7 billion worth of goods in 2007, a 4.7% increase over the previous year.

Overall, five of seven wholesale sectors reported weaker sales in December, with the automotive-products sector accounting for around half of the overall decline, dropping 8.1%.

Other wholesalers fared little better, falling 1.7% in December.

All seven wholesale sectors registered growth in 2007, led by the “other products” and the personal-and household-goods sectors.

The automotive sector was the only area to record growth significantly below the national average during 2007.