Canada’s inflation rate increased 4.4 per cent in April, the first acceleration since June 2022, underlining the Bank of Canada's challenge in battling inflation back to 2 per cent.
The increase in the Consumer Price Index (CPI) was driven by higher monthly gas prices, increased rent prices and rising mortgage costs, Statistics Canada said on Tuesday. On a monthly basis, CPI increased 0.7 per cent, or a seasonally adjusted 0.6 per cent.
The increase caught economists off guard, who had expected inflation growth to continue softening and edge down to 4.1 per cent in April from 4.3 per cent in March, according to Reuters.
"Canada's CPI accelerated by only a single tick in [April], but the 4.4 per cent print will still be a bit of an eyebrow raiser for those counting on steady progress," CIBC economist Avery Shenfeld wrote in a note shortly after CPI data was released.
"The risk of a return to rate hikes at the next (Monetary Policy Report) release can’t be ruled out, as staying on hold is now very dependent on seeing a slowdown in the labour market."
Statistics Canada said higher rent and mortgage interest rate costs contributed the most to April's increase on a year-over-year basis. Rent was up 6.1 per cent in April amid higher demand. Mortgage interest rate costs jumped 28.5 per cent, as more Canadians initiated or renewed at higher interest rates.
Food prices remain elevated in Canada. The cost of food purchased from stores increased 9.1 per cent in April, a slight slowdown from the 9.7 per cent increase recorded in March, amid smaller hikes for fresh vegetables and coffee and tea.
Gas prices increased 6.3 per cent in April compared to last month, the largest monthly increase since October 2022. Still, gas prices were lower on a year-over-year basis, after price surges last year following Russia’s invasion of Ukraine.
What it means for the Bank of Canada
Canada’s inflation rate had been on a steady decline since reaching a peak last June of 8.1 per cent, the last month that CPI accelerated. Inflation had increased 4.3 per cent in March, the smallest increase since August 2021, thanks to base-year effects and a slowdown in gasoline prices.
"The slow down in Canadian inflation is looking like it might have been a false dawn," Royce Mendes, Desjardins' managing director and head of macro strategy, wrote in a note on Tuesday. He said that the Bank of Canada's core measures of inflation remain elevated, something that "will be disconcerting for policymakers."
"Expect upcoming communications to remain hawkish and focused on bringing inflation to heel, leaving the door open to further rate increases. That said, data can be volatile, and today’s print won’t seal the deal on further tightening."
The Bank of Canada has most recently held its benchmark rate steady at 4.5 per cent as it tries to tame high prices. In its most recent decision made in April, the central bank has said it expects inflation will continue to decline in the next few months. However, the Bank of Canada signalled that getting inflation back to 2 per cent “could prove to be more difficult” for the central bank, noting that inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize.
"April's print throws cold water on any notion that we're out of the woods with inflation," Desjardins principal economist Marc Desormeaux wrote in a note.
"April’s inflation data leave the door open for further Bank of Canada rate hikes... We still think softening economic activity will eventually help bring inflation to heel, but today’s data suggest that the process could take longer than previously anticipated."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.