Canada shaved a full percentage point off its annual inflation rate in May, but there are ample signs that restoring price stability will be a difficult and lengthy task for the Bank of Canada.

The Consumer Price Index rose 3.4 per cent in May from a year earlier, down from 4.4 per cent in April, Statistics Canada said Tuesday in a report. The slowdown met analyst expectations on Bay Street. Adjusted for seasonality, the CPI rose 0.1 per cent on a monthly basis.

The May result benefited from favourable comparisons to a year ago. Commodity prices surged after Russia’s invasion of Ukraine in early 2022, but those initial effects are no longer part of the year-over-year calculation of consumer price inflation.

For instance, gasoline prices – which peaked in the late spring of 2022 – fell 18.3 per cent on an annual basis.

Still, inflation is proving tricky to tame. The short-term trend for various measures of core inflation – which strip out volatile components of the CPI – is tracking just below 4 per cent annually.

Instant reaction: Money markets pare back odds of July rate hike after Canada inflation data

The Bank of Canada has expressed concern that inflation could get stuck materially above its 2-per-cent target. This prompted the central bank to raise its policy rate to 4.75 per cent from 4.5 per cent earlier this month, ending a pause to changes in monetary policy.

“It looks almost like a done deal that the Bank of Canada will raise rates” again in July, said Royce Mendes, head of macro strategy at Desjardins Securities, in a note to clients.

Grocery costs are still climbing at robust rates. Those prices rose 9 per cent on an annual basis, down slightly from 9.1 per cent in April. Bakery products rose 15 per cent, while cereal products jumped 13.6 per cent. Price growth accelerated at restaurants.

In a report published Tuesday, the federal Competition Bureau said the country needed “more competition” in the grocery sector to improve products and help lower prices.

Mortgage interest costs rose nearly 30 per cent from a year earlier. The Bank of Canada’s rate-hike campaign is having a significant impact on this area of the CPI, particularly as homeowners renew their mortgages at higher rates or as they dedicate more of their monthly payments to the interest portion, rather than principal.

Excluding mortgage interest costs, the CPI rose 2.5 per cent in May from a year earlier, down from 3.7 per cent in April.

Canada’s affordability crisis is adding more pressure to the rental market, in which prices rose 5.7 per cent in May from a year earlier.

There is, however, major progress in some industries. Prices for durable goods rose 1 per cent in May on an annual basis, slowing from 2.2 per cent in April, as supply chains return to more normal operations. Prices for furniture fell 2.9 per cent, the most since the early stages of the COVID-19 pandemic.

The Bank of Canada is aggressively raising interest rates to tamp down demand and bring inflation under control. However, consumer spending has been exceptionally strong to start the year. This, along with other strong economic data, convinced the bank that monetary policy was not restrictive enough to subdue CPI growth.

The bank’s governing council “felt that a broad range of indicators had increased their concern that the disinflationary momentum needed to bring inflation back to the 2-per-cent target could be waning,” read a summary of deliberations for the June rate hike. That decision brought the benchmark interest rate to its highest level since 2001.

Back in April, the Bank of Canada projected that annual inflation would fall to around 3 per cent in the summer months, before declining to the 2-per-cent target in late 2024.

Andrew Grantham, senior economist at CIBC Capital Markets, said that inflation could soon fall below 3 per cent.

“However, inflation could accelerate slightly again after that, particularly if food prices continue to climb, and as the base effects from energy prices become less favourable,” he wrote in a research note. “Overall, today’s data don’t change the fact that inflation is running hotter” than the bank estimated in April.

The central bank will publish updated economic projections at its next rate decision on July 12. Financial analysts widely expect the BoC to hike its benchmark interest rate by another quarter percentage point, taking it to 5 per cent.

“Bank of Canada policymakers won’t breath a huge sigh of relief after this report as core inflation remains sticky and has yet to show signs of a durable slowdown,” Benjamin Reitzes, a rates and macro strategist at Bank of Montreal, said in a client note.

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