Annual inflation unexpectedly rose to 4.4% in April, Statistics Canada said. Analysts polled by Reuters had expected the annual rate to edge down to 4.1% from 4.3% in March. Month-over-month, consumer prices gained 0.7% from March, higher than the forecast 0.4% increase.

"The market is under-pricing the probability the Bank (of Canada) comes back and hikes again," said Derek Holt, vice president of capital markets economics at Scotiabank. "I don't see any slowing down in terms of the underlying price pressures."

The Bank of Canada (BoC) has kept rates unchanged at its last two policy setting meetings as it assesses whether its eight-consecutive rate hikes have been sufficient to tame inflation, which peaked at 8.1% last year.

BoC Governor Tiff Macklem has said that Canadian inflation risks getting stuck significantly above the Bank of Canada's 2% target, and if that happens the central bank is ready to raise interest rates further.

Money markets moved to price in a 22% chance of a Bank of Canada rate increase at its next policy meeting on June 7, up from about 10% before the data.

"Markets are still underweighting the possibility of an insurance hike on June 7th, especially in the context of BoC communications that prioritised the upside risks to inflation and expressed worries about core inflation getting stuck above 3%," said Jay Zhao-Murray, market analyst at Monex Canada.

Higher rent and mortgage interest costs contributed the most to the annual inflation rate in April, Statscan said. The higher interest rate environment may have increased demand and subsequently prices for rentals, the agency said.

The average of two of the BoC's core measures of underlying inflation, CPI-median and CPI-trim, came in at 4.2% compared with 4.5% in March.

"The fact that core measures of inflation remained elevated in April will be disconcerting for policymakers," said Royce Mendes, head of macro strategy at Desjardins Group. "Expect upcoming communications to remain hawkish and focused on bringing inflation to heel, leaving the door open to further rate increases."

The prices for groceries, however, rose at a slower pace in April than in March, helped by smaller price increases for fresh vegetables and coffee and tea, Statscan said. Excluding food and energy, prices rose 4.4% compared with a rise of 4.5% in March.

The month-over-month inflation rate was driven by gasoline prices, which posted the largest monthly increase since October, following an announcement from OPEC+ to cut oil output, Statscan said.

The Canadian dollar was trading 0.3% higher at 1.3425 to the greenback, or 74.49 U.S. cents.