HST drives up Canada's inflation rate

Canada's annual inflation rateincreased to 1.8 per centfor July, boosted by the HST,after aone per centrisein June.

Prices were affected bythe introduction of the harmonized sales tax in Ontario and British Columbia, and a two-percentage-point increase in Nova Scotia's HST, Statistics Canada said Friday.

In Ontario, consumer prices were up2.9 per cent from a year earlier after June's1.6 per cent increase. Prices for gasoline, electricity, and passenger vehicle insurance premiums went up, andconsumers also paid more for homeowner's replacement costs.

In B.C., consumer prices rosetwo per centfor the 12-month period to July after a0.5 per cent increase in June. Consumers saw a 36.7 per cent price increase in the cost of electricity, whilerestaurant pricesincreased7.5 per cent.

Below forecasts

However, the overallreport was softer than economists had been forecasting. Expectations were for the annual inflation rate to come in between two per centand 2.1 per cent.

The core rate of inflation which factors out several volatile components and consumption taxes such as the HST came in at 1.6 per cent. That was down from 1.7 per cent in June and beloweconomists' forecasts, which ranged from 1.7 per cent to 1.8 per cent.

"The start of the harmonized sales tax in B.C. and Ontario last month was the dominant factor here," BMO Capital Markets deputy chief economist Doug Porter wrote in a note.

"Overall, these results are milder than expected given that Canada just had one of the bigger price 'events' for quite a few years [the HST], and overall inflation remained below two per cent is quite remarkable."

Added Porter: "While the HST made all the noise last month, the fact is that underlying inflation remains quite tranquil, neither threatening to dip into deflation terrain nor pushing above the [Bank of Canada's annual] two per cent target."

He said the modest price gains give the central bank time to breathe before hiking interest rates this fall.

Traders who had bet that the Bank of Canada would raise rates to head off inflation sold the Canadian dollar. It lost value for a second day, closing at 95.35 cents US, after losing 0.88 of a cent.