By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) -Canada’s annual inflation rate dropped more than expected to a 27-month low of 2.8% in June led by lower energy prices, data showed on Tuesday, though food and shelter cost increases persisted despite 10 interest rate hikes in less than 18 months.

Analysts polled by Reuters had forecast inflation to drop to 3.0% from 3.4% in May. Month-over-month, the consumer price index was up 0.1%, Statistics Canada said, which was also lower than the 0.3% forecast.

June’s reading, which benefited from a comparison to the four-decade high inflation a year earlier, means the annual rate was within the Bank of Canada’s 1% to 3% control range for the first time since March 2021. The bank targets 2% inflation.

“Inflation is definitely moving in the right direction, but we’re seeing stickier and more persistent core measures,” said Michael Greenberg, senior vice president and portfolio manager at Franklin Templeton Investment Solutions.

Excluding food and energy, prices rose 3.5% compared with a 4.0% gain in May. Grocery prices rose 9.1% year-over-year in June, a tick higher than the increase recorded in May. Prices of food from restaurants slowed slightly in June from May.

Shelter costs increased a seasonally adjusted 0.5% in June from May.

The average of two of the Bank of Canada’s (BoC) core measures of underlying inflation, CPI-median and CPI-trim, came in at 3.8% compared with 3.9% in May.

“The Bank of Canada’s preferred measures of core inflation, which exclude significant moves in individual categories, show that underlying price pressures remain sticky,” said Royce Mendes, head of macro strategy at Desjardins Group.

The three-month annualized rate of the core median measure remained at 3.6%, while the trimmed mean indicator accelerated to 4.0% from 3.9% in May, Mendes said.

Canada’s Finance Minister Chrystia Freeland, speaking to reporters on a call from India where she had attended a G20 meeting, hailed the inflation report as a “milestone moment” and said inflation was lower in Canada than in any other G7 country.

Freeland urged Canadian businesses – especially food retailers – “to be responsible right now and to support Canadians and the Canadian economy by a responsible approach to their pricing.”

The Bank of Canada last week raised rates to a 22-year high of 5.0%, its tenth rate increase since March of last year, and said it could hike them further if fresh data shows inflation is stalling above its target.

The central bank, citing excess demand, said last week that it expects inflation to remain around 3% over the next year before dropping to the bank’s 2% target by mid-2025, six months later than previously anticipated.

“We’re still not at 2%,” said Jules Boudreau, senior economist at Mackenzie Investments. “So there’s still some work to be done. But policy is probably restrictive enough at the moment to do that.”

Money markets trimmed bets for a rate hike at the BoC’s next meeting in December to a 20% probability from 25% before the data.

The price of gasoline, which led the slowdown, fell 21.6% compared with June 2022 when China, the largest importer of crude oil, eased some COVID-19 public health restrictions that contributed to higher global demand.

The Canadian dollar was trading 0.2% lower at 1.3225 to the greenback, or 75.61 U.S. cents.

(Reporting by Ismail Shakil and Steve Scherer in Ottawa; additional reporting by Fergal Smith and Nivedita Balu in Toronto; Editing by Dale Smith, Will Dunham, Alexandra Hudson and Deepa Babington)

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