OTTAWA - Consumer prices in Canada tumbled last month in their steepest one-month drop in nearly half a century, as falling energy prices chopped the annual inflation rate by almost a full point to 2.6 per cent from 3.4 per cent in September.

The dive -- a full point on an unadjusted month-to-month basis -- raised the spectre that Canada could be heading for a period of deflation, in which the economy shrinks and prices drop.

"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."

Consumer confidence has been badly shaken by fears of a global recession, leading to stock markets that plunged sharply in October as governments around the world expressed pessimism and massive bailout plans were floated to prop up faltering American banks.

Oil prices have also dropped by nearly two thirds since reaching a record high of about US$147 a barrel in mid-July as global recession fears raised concerns that energy demand will drop sharply in North America, Europe and Asia.

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 fallen sharply again this month -- 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.

Still, Porter says deflation is less likely in Canada as 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.

CIBC World Markets economist Avery Shenfeld agreed, saying inflation "is simply not a problem, being low enough for the Bank of Canada to go all-out to get the economy moving, but not seriously threatening the much dreaded deflation disease."

The United States reported Thursday that its inflation rate fell a full percentage point on an annualized basis in October.

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.

The evidence for impending deflation lies in the slowing price growth and in many cases outright decline in almost all components measured by Statistics Canada, with the exception of food, which rose for the eighth straight month in October.

Overall, food prices were 6.1 per cent higher in October than last year, Statistics Canada said.

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.

"That's a indication of the consumer pulling back," said Porter. "With notable weakness in a variety of core components adding to the deep dive in gasoline, the Bank of Canada has the all-clear signal to continue cutting (interest) rates."

The only question, said Porter, is whether the next interest rate action on Dec. 9 will be a quarter point or a half point, with some now suggesting that a three-quarter point cut to 1.5 per cent for the overnight rate may be in play.

Bank of Canada government Mark Carney hinted strongly earlier this week that he is prepared to cut the trendsetting rate to encourage Canadians to borrow and spend.

Regionally, the annual inflation rate fell in eight of the 10 provinces, with only Saskatchewan and Manitoba bucking the trend.