By Paul Vieira

OTTAWA--Canada's annual inflation rate unexpectedly decelerated in December from the previous month, on lower prices for gasoline, phone service and air fares.

The report is likely to counter initial worries about inflation picking up significant momentum in 2021.

Canada's consumer-price index rose 0.7% on a year-over-year basis in December, Statistics Canada said Wednesday, versus a 1.0% advance in the previous month. Market expectations were for a 1.0% increase, according to economists from TD Securities. On a month-over-month basis, prices fell 0.2% in December.

The Bank of Canada's preferred measures for underlying inflation also fell from the previous month, according to Statistics Canada, with the average core CPI in December coming in at 1.57%. That is down from 1.67% in the previous month and 1.73% in October. Core inflation is meant to gauge price changes in items that exclude volatile goods like food and energy.

"Overall, this is a report that should assuage concerns over the combination of accommodative fiscal and monetary policies to generate very strong inflation in the near term," said Jimmy Jean, strategist at Desjardins Securities. He said he expects inflation to remain muted in early 2021, in part because of economic restrictions and stay-at-home orders in Canada's biggest provinces to contain the spread of Covid-19.

The chief executive of Royal Bank of Canada, Dave McKay, told investors this month he expects inflation to surge this year once the economy begins to settle following an initial round of vaccinations. Forecasting firm Capital Economics predicted that Canada's annual inflation rate could rise to 3% this spring and remain in the upper half of the Bank of Canada's target range of 1% to 3%.

The Bank of Canada has indicated it is prepared to leave its benchmark rate unchanged, at 0.25%, until 2023 to ensure a full recovery from the depths of the pandemic.

For all of 2020, Statistics Canada said inflation rose 0.7% on an average annual basis, or the slowest increase since 2009. The pandemic slowed price growth in goods and services last year, reflecting people staying home and traveling less.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

01-20-21 0932ET