Canada’s inflation rate rose to 3.2 percent in May, marking the highest annual increase in 29 months, according to data released Monday. The surge exceeded economists’ forecasts, which had anticipated a 3 percent rise. The notable increase was driven primarily by a sharp escalation in gasoline prices, influenced by ongoing tensions surrounding the Iran conflict.

Gasoline prices in May climbed 33.2 percent year-over-year, reaching levels surpassing those seen during the previous high point four years ago amid the Russia-Ukraine war. This spike significantly contributed to a 9 percent annual rise in transportation costs, which make up nearly 18.5 percent of the Consumer Price Index (CPI) basket. However, analysts noted that gasoline prices have begun to retreat in June following a recent interim peace agreement between the United States and Iran, potentially easing inflationary pressures in the coming months.

Despite the elevated headline inflation figure, underlying price pressures remained more moderate. When excluding gasoline, Canada’s CPI edged up 2.2 percent in May, up from 2 percent in April, driven by higher costs for food, recreation, and alcoholic beverages. Food prices rose 3.8 percent year-over-year, accelerating from 3.5 percent in April. Notably, fresh fruit and vegetable prices increased by 5.3 percent and 9 percent, respectively.

Shelter costs, the largest component of the CPI basket at nearly 30 percent, showed a slower rise in May, increasing 1.7 percent compared to 1.8 percent in April. This moderation was partly due to a 0.2 percent decline in mortgage costs over the month.

Monthly inflation also accelerated, reaching 1 percent in May, the highest monthly increase in 15 months and above market expectations of 0.8 percent.

Core inflation measures, which exclude volatile items, remained steady. The CPI-median, reflecting the middle point of the inflation distribution, was recorded at 2.1 percent, while CPI-trim, which removes the most extreme price changes, held at 2 percent. According to Doug Porter, chief economist at BMO Capital Markets, core inflation staying near target suggests broader price trends remain contained despite the temporary boost from energy costs.

The Bank of Canada is unlikely to adjust its inflation outlook based on this data, given its recent assessment that higher energy prices have yet to trigger sustained increases across the broader economy. The central bank has been monitoring inflation closely in light of rising living costs, which pose ongoing political and economic challenges for Prime Minister Mark Carney’s government following its parliamentary majority win in April.