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Products on display at one of the butchers at the St. Lawrence Market in downtown Toronto.Fred Lum/the Globe and Mail

Canada’s annual inflation rate ticked higher in April, a surprise acceleration that shows the road back to price stability could be long and bumpy.

The Consumer Price Index rose 4.4 per cent in April from a year earlier, after a 4.3-per-cent increase in March, Statistics Canada reported on Tuesday. Financial analysts were expecting an inflation rate of 4.1 per cent. Adjusted for seasonality, consumer prices rose 0.6 per cent in April from March.

The annual inflation rate has nearly halved since hitting a peak of 8.1 per cent last June. However, wrestling inflation back to the Bank of Canada’s 2-per-cent target is unlikely to be a smooth process.

While the central bank projects inflation will simmer to around 3 per cent this summer, it has also warned that price increases in the services sector could prove sticky. The bank forecasts a return to 2-per-cent inflation by late 2024.

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The CPI numbers, combined with a tight labour market, will test whether the Bank of Canada thinks interest rates are sufficiently high enough to restrain inflation.

“One month does not a trend make. We have still cut inflation almost in half from where it stood at the peak,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

However, Mr. Shenfeld said the Canadian economy will need to experience a material slowdown – notably in the hot labour market, which has a near-record-low unemployment rate – to bring inflation under control.

“Even though a lot of the inflation has melted away, we can’t really expect to get to 2 per cent without seeing any economic pain whatsoever,” he said.

The latest CPI numbers were heavily influenced by gasoline and some aspects of the housing market. Gas prices rose 6.3 per cent in April, which Statscan pinned on an OPEC+ decision to reduce oil output, thereby raising prices. Crude prices have tumbled since mid-April, which should help lower the headline inflation rate in May.

Mortgage interest costs rose 28.5 per cent on an annual basis in April as more homeowners dealt with sharply higher borrowing rates. Rents jumped 6.1 per cent from a year earlier. Statscan said higher interest rates may be contributing to more demand for rental units as would-be buyers get priced out of home ownership.

On the other hand, there was progress at the supermarket. Prices for groceries rose 9.1 per cent in April from a year earlier, down from 9.7 per cent in March. Grocery inflation appears to have peaked at more than 11 per cent in recent months. Cost increases at earlier stages of the supply chain – for instance, the prices received by farmers – have slowed dramatically of late, which should influence consumer prices in the months to come.

The short-term trend for inflation was less favourable last month. Expressed at an annualized rate, three-month core inflation – excluding food and energy – was 4.2 per cent in April, up from 3.1 per cent in March.

Bank of Canada officials have repeatedly stressed in recent communications that the final leg of restoring price stability – getting inflation to 2 per cent from 3 per cent – could prove challenging.

To successfully bring inflation under control, several things will need to happen, Governor Tiff Macklem said in a recent speech at the Toronto Region Board of Trade. These include a moderation in wage growth, a normalization of corporate pricing behaviour and lower expectations of near-term inflation.

Despite the inflation uptick on Tuesday, the Bank of Canada is widely expected to hold its policy rate at 4.5 per cent at its next decision on June 7. Over less than one year, the central bank raised its benchmark interest rate at eight consecutive meetings before pausing in March. The Bank of Canada is intentionally trying to slow the economy to bring supply and demand into better balance. However, that pause is not set in stone.

“If we start to see signs that inflation is likely to get stuck materially above our 2-per-cent target, we are prepared to raise rates further,” Mr. Macklem said in his speech.

Mr. Shenfeld of CIBC doesn’t think we’ve hit that threshold yet, a view that was widely shared on Bay Street on Tuesday. It can take time – 18 to 24 months – for rising interest rates to fully transmit to the economy. Moreover, there are ample signs that economic growth has slowed to a tepid pace in recent months.

At the same time, employers are continuing to churn out thousands of jobs by the month, which has kept the unemployment rate at 5 per cent, just shy of a record low.

“If we look at inflation overall, it’s still twice as hot as the Bank of Canada wants to see,” Mr. Shenfeld said. “We’re not going to get resistance to higher prices until we have incomes growing more slowly.”

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