Inflation has cooled back into the Bank of Canada’s target range, but economists are warning that might not be enough to stave off future interest rate hikes.

The annual rate of inflation cooled to 2.8 per cent last month, according to Statistics Canada, down from 3.4 per cent in May. That marks a substantial decline from the peak of inflation at 8.1 per cent in June of last year but core metrics remain “stickier,” economists note.

Core inflation refers to the change of the consumer price index excluding more volatile items such as the food and energy.

The federal agency said Tuesday that the slowdown in prices was “broad-based” but attributed most of the decline to a drop in gas prices compared to this time last year. Canadians continue to face high inflation at the grocery store, with prices rising 9.1 per cent annually in June.

The Bank of Canada’s target range for inflation is one-to-three per cent, but policymakers at the central bank have made it clear they will continue to keep pressure on prices until inflation returns back down to two per cent.

The central bank raised interest rates earlier this month, in part because of concerns that inflation would stay high for longer. It now expects Canada’s inflation rate to hover around three per cent for the next year, before steadily declining to the two per cent target by mid-2025.

Finance Minister Chrystia Freeland on Tuesday called the June inflation print a “milestone moment.”

“The fact that inflation has come down below three per cent, it is now within the one-to-three per cent target range, which is the target set by the government for the Bank of Canada, that significant moment should provide a lot of relief to Canadians,” she said following a meeting of G20 finance ministers and central bank governors meetings in India.

But the Bank of Canada’s rate hikes are also feeding into higher inflation through mortgage interest costs.

Statistics Canada says that excluding mortgage interest costs, inflation would have risen two per cent year-over-year in June.

The role of higher interest rates in fuelling inflation has some economists calling the Bank of Canada’s tactics into question. Marc Lee, senior economist with the Canadian Centre for Policy Alternatives, says the central bank’s strategy might not be the right approach as rate hikes themselves intensify the cost of living.

“I think that there are a lot of questions around how the Bank of Canada is conducting monetary policy, whether its diagnosis of inflation is actually correct, and whether interest rates are the right remedy for the inflation that we’re seeing,” he tells Global News.

Governor Tiff Macklem was asked after raising rates for a second time in a row earlier this month why the Bank of Canada is continuing its rate tightening cycle if the higher costs on mortgages are now themselves a primary fuel for inflation.

Macklem said he understands that higher interest rates are “squeezing many Canadians,” but added that raising the cost of borrowing is necessary to bring overall inflation back in line. “Restoring price stability” by returning inflation all the way back to the two per cent target is better than the risk of letting price pressures run unchecked, he argued.

“There’s no easy path to restoring price stability,” Macklem said on July 12.

“We do need to slow demand in the economy. That’s what’s going to relieve those price pressures. And the way we do that is, we raise interest rates.”

Despite overall inflation trending down and settling back into the Bank’s target range, economists are warning it doesn’t mean the central bank’s work is done.

CIBC senior economist Andrew Grantham said in a note to clients Tuesday morning that Canada might retrace some of its progress in the months ahead as inflation will “likely creep back” above three per cent. Because much of the deceleration is tied to the higher gas prices of a year earlier, the impact of relatively lower prices will fall out of the annual consumer price index comparison in the months to come, he explained.

There has also been a lack of progress in taming underlying inflation — the Bank of Canada’s preferred metrics of core inflation have yet to meaningfully decline, Grantham noted.

StatCan said Tuesday that the three core measures of CPI all ticked down 0.1 percentage points in June compared to May and the average of these three metrics remains above four per cent.

Grantham said that without meaningful easing in core inflation, there is a “very real risk that interest rates could be raised again after the summer.”

RBC economist Claire Fan said in a note Tuesday that the Bank of Canada’s efforts to hike interest rates and slow demand has come up against a resilient Canadian consumer in the first half of 2023, which has kept core inflation “stickier” than the central bank would like.

“The central bank is also clearly willing to hike interest rates further if necessary,” she wrote.

However, Fan said she expects a slowdown in the economy heading into the second half of the year will be enough to keep the Bank of Canada on the sidelines.

Grantham, too, believes that the Bank of Canada is “overshooting” in its efforts to bring price pressures back under control, and expects inflation will hit two per cent in the second half of 2024 — a full three quarters ahead of the central bank’s own revised forecasts.

Lee says he expects that, with inflation back in a “safer range” now, the Bank of Canada will be able to pause its rate increases for the rest of the year and potentially begin cuts in 2024.

“We’re actually in a pretty sweet spot right now heading into the summer 2023 … in straight up economic terms, if you look at that, we’re looking pretty good.”

— with files from Global News’ Kyle Benning and The Canadian Press