OTTAWA - Living in Canada got a lot more expensive last month as the accelerating price of gasoline and the emergence of food inflation pushed the rate of increase in Canada's consumer price index to over three per cent for the first time in nearly three years.

Statistics Canada said Wednesday the country's annual inflation rate jumped to 3.1 per cent in June from 2.2 per cent the previous month, the biggest one-month leap since September 2005.

From May, prices were 0.7 per cent higher.

As was the case in 2005 when hurricanes Katrina and Rita caused a spike in oil prices, energy costs fuelled inflation in June.

The cost of filling up at gasoline stations rose by 26.9 per cent from a year earlier, and by 5.8 per cent from May.

If not for gasoline, Canada's annual inflation rate would have stood at a tepid 1.8 per cent in June, the agency said.

As well, fuel oil and other fuels rose 49.3 per cent, the same pace as in May.

As had been predicted for several months, food price inflation made an appearance, with store-bought food rising three per cent on an annual basis.

The chief culprit in the rise in food prices continued to be baked goods, up 12.3 per cent, but there also were price hikes for other items such as lettuce, milk and butter. Food inflation stood at 1.9 per cent in May.

And restaurant prices had the biggest runup since the GST was introduced in 1991, up 0.9 per cent from the previous month.

"The bottom line is that Canadians just aren't sheltered from forces we're seeing around the world on food, partly because the Canadian dollar is no longer rising and cutting into import prices," economist Douglas Porter of BMO Capital Markets said in an interview.

"Part of it is the incredible pressures on things like pasta, flour and bread."

Pasta products were 35.9 per cent costlier than 12 months earlier, while flour cost 44.5 per cent more and bread was on average 17.7 per cent more expensive.

But while food costs are forecast to rise further, consumers may have seen the worst of energy prices. The cost of a barrel of crude oil has declined about $20 since spiking on July 11 at above US$147, which Porter said could show up in lower overall inflation in the months ahead.

The Bank of Canada forecast last week that inflation would rise steadily through the second half of 2008 and peak at 4.3 per cent in the first quarter of 2009. This estimate was based on oil remaining above US$140 a barrel.

On commodities markets, oil prices shed nearly US$4 Wednesday, tumbling below $125 a barrel for the first time since early June on growing fears that high prices and the weak economy are destroying demand.

Light, sweet crude for September delivery dropped $3.98 to settle at $124.44 a barrel on the New York Mercantile Exchange. The drop in crude should continue to put downward pressure on gasoline prices, which have dropped several cents a litre in many Canadian markets in recent weeks.

A better measure of whether Canada has a real inflation problem is the core price index, Scotiabank economists Derek Holt and Karen Cordes wrote in a note.

They point out that the rise in core prices - excluding energy and other volatile items - is stable and well below the central bank's two per cent target for inflation.

"Core inflation remained at 1.5 per cent for the third consecutive month, signalling once again that current inflation fears are overblown and that there is room for the BoC to reduce rates once again if needed," they wrote.

"While higher headline inflation will feed into core inflation with a lag, a weakening Canadian economy will continue to offset these pressures."

Merrill Lynch Canada economist David Wolf agreed.

"We remain of the view that the current rise in headline inflation will prove temporary, to be sorted by a slackening economy and a flattening-out in commodity prices, with no need for a Bank of Canada response," Wolf wrote in a research note.

"We expect that the balance of risks will shift from tighter to easier (interest rate) policy by early 2009 as the inflation scare recedes and the economy remains weak."

Other items with significant price increases in June included mortgage costs, up nine per cent from a year earlier, home maintenance costs, up 3.2 per cent, and motor vehicle insurance, up 5.3 per cent.

The cost of flying rose by 14.3 per cent, the largest increase since May 2002, as airlines passed on the higher cost of fuel.

Not all things were more expensive in June, however.

The price of purchasing or leasing an automobile continued to fall, down 8.4 per cent from June 2007. Computer equipment and supplies were 13.2 per cent less expensive, and books, clothes and furniture were also cheaper.

Regionally, inflation was highest in Prince Edward Island on an annual basis at 4.7 per cent, followed by Alberta at 4.4 per cent. Inflation was lowest in New Brunswick (2.1 per cent) and Manitoba (2.4 per cent).

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