Ottawa's annualized inflation rate dropped 10 basis points in January to 0.6 per cent, Statistics Canada reported Friday.
Nationally, lower gasoline prices helped push Canada's inflation rate to its lowest level in more than three years.
Statistics Canada said the consumer price index in January was up 0.5 per cent, the slowest increase since October 2009 and below economists' expectations of a 0.7 per cent increase.
December's gain had been 0.8 per cent.
Excluding gasoline prices, which fell 1.8 per cent year-over-year, Canadian inflation increased 0.6 per cent after rising 0.8 per cent in December. Higher prices for food, up 1.1 per cent, helped offset the lower fuel prices.
Core inflation, which is watched by the Bank of Canada and excludes the most volatile items, was 1.0 per cent for January, at the low end of the central bank's target range.
The inflation report came as Statistics Canada also announced a larger than expected drop in retail sales in December.
Statistics Canada reported Friday that retail sales in the final month of 2012 fell 2.1 per cent, breaking a streak of five consecutive monthly gains and the largest drop since April 2010.
Economists had expected a drop of just 0.3 per cent.
The Canadian dollar fell to a fresh seven-month low after the two reports, dropping by about one-fifth of a cent from where it was just before the Statistics Canada releases.
The loonie was at 97.82 cents US about half an hour after the statistics were released, down 34-100ths from the close on Thursday.
"Most store types typically associated with holiday shopping registered weaker sales in December," Statistics Canada said in its report.
Sales fell in seven of the 11 subsectors tracked by the agency.
Excluding sales a motor vehicle and parts dealers, which saw a 6.4 per cent decline, overall retail sales fell 0.9 per cent.
General merchandise stores fell 9.7 in December, due to department store closures.
Meanwhile, sales at electronics and appliance stores fell 12.1 per cent following a double-digit gain in November.
Sporting goods, hobby, book and music store sales fell 1.8 per cent, while furniture and home furnishing store sales dropped 1.3 per cent.
Retail sales were down in every province.
Last month, the Bank of Canada trimmed its expectations for economic growth in 2013 and governor Mark Carney said the need to raise borrowing costs was "less imminent."
Analysts interpreted the statement as signal the bank's trendsetting policy rate would remain at one per cent well into 2014.
Among the eight components tracked by Statistics Canada, prices rose in six of them with the transport ion and clothing and footwear components being the exceptions as they dropped 0.5 per cent and 1.5 per cent respectively.
Food prices rose 1.1 per cent on a year-over-year basis in January, while household operations, furnishings and equipment gained 0.6 per cent. Health and personal care gained 0.3 per cent.
Recreation, education and reading gained 0.3 per cent, while alcohol and tobacco were up 1.1 per cent.
Shelter costs rose 0.6 per cent.