PREVIEW-Canada consumer prices set to fall again in August

* CPI decline seen less steep in August than in July

* Rate of core inflation easing

* Bank of Canada likely comforted by low prices

By Louise Egan

OTTAWA, Sept 15 (Reuters) - Canadian consumer prices likely fell in August from a year earlier due to slack in the economy and lower import prices, but the Bank of Canada need not worry about a prolonged deflationary bout, analysts say.

The consumer price index likely fell 0.7 percent year-on-year in August, according to analysts in a Reuters poll.

The expected decline is not as sharp as in July, when the CPI dropped 0.9 percent year-on-year, the steepest fall since 1952, when it plunged by 1.4 percent.

Statistics Canada will release its August inflation report at 7 a.m. (1100 GMT) on Thursday.

Prices have been falling in annual terms since June but economists and central bankers expect them to hit their low point in the third quarter before climbing again by yearend.

The Bank of Canada is keeping a closer watch on core inflation, which excludes volatile items like gasoline and some foods, than on overall CPI. Analysts expect core inflation to ease to 1.6 percent year-on-year in August from 1.8 percent in July.

On a monthly basis, both measures of inflation are forecast to inch up 0.1 percent from July.

"I think we'll start to see the headline (overall inflation rate) now inch up as we get into an era where energy prices are once again rising," said James Marpole, economist at TD Securities.

"But on the core rate of inflation, we still have a lot of excess capacity in the Canadian economy, the unemployment rate is still quite high, and that will limit any significant upward pressure," he said.

The Bank of Canada forecasts that prices will trough in the third quarter and start rising again in the fourth, hitting the bank's 2 percent target by mid-2011.

A low price environment helps the bank keep its pledge to hold its key interest rate unchanged at a rock-bottom 0.25 percent until July 2010 without spurring inflation.

The economy is starting to show signs of revival and with that prices would normally rebound. The resale housing market, in particular, has made a surprising turnaround with resale prices rising 11.3 percent in August from August 2008, according to an industry group report on Tuesday.

Helping to offset that is a roughly 20 percent rise in the value of the Canadian dollar since March, which makes it cheaper to buy imported goods such as clothing. Further, high unemployment means that businesses may supply more goods than consumers are demanding, keeping prices low.

"It gives the bank a little more comfort when they start talking about rates on hold, even when you have better numbers elsewhere in terms of activity," said Mark Chandler, economist at RBC Capital Markets.

"Earlier in the year you had prices that were, in the core component, surprisingly sticky ... the longer they remain sticky like that the more the bank gets a little edgy," he said. (Reporting by Louise Egan; editing by Peter Galloway)