Source: The Canadian Press

New harmonized sales taxes in some provinces pushed up Canada’s inflation rate last month — but the increase was still softer than what many economists had forecast.

Canada’s annual inflation rate rose by eight-tenths of a point in July to 1.8%. Month-to-month, the consumer price index rose half a percentage point from June.

Statistics Canada says changes in sales taxes in Nova Scotia, Ontario and British Columbia affected consumer prices in July.

“In July, consumer prices were affected by changes in consumption taxes in Nova Scotia, Ontario and British Columbia,” the agency said.

The governments of British Columbia and Ontario introduced new harmonized sales taxes in July. Nova Scotia also bumped up its HST by two percentage points.

In B.C., the battle over introduction of the tax is still going on, with a judge on Friday saying a petition signed by more than 700,000 provincial residents angry over it is valid, turning up the heat on the government.

The Bank of Canada had forecast the new taxes would increase inflation in the coming months — and they did. Prices were higher across the board, with increases in seven of the eight major components.

Consumer prices rose in the three provinces hit by changes to their sales taxes. Statistics Canada says the HST accounted for about 1.3% of Ontario’s 2.9% year-over-year increase, 1.2% of British Columbia’s 2% increase and 0.8% of Nova Scotia’s 1.7% increase.

But the head of the agency’s consumer prices production section says it’s impossible to know the HST’s true impact on July’s inflation numbers.

“You should regard these estimates as really upper-bound estimates,” Ron Morency said.

“And the reason for that is that it accounts for the entire amount of the tax-rate increase that was faced by consumers, but it doesn’t account for any of the secondary market forces in terms of how prices are determined, or it doesn’t take into account any of the credits or savings that might be available to producers now.”

Gauging the HST’s full impact proved difficult for the statisticians.

“It’s impossible to really know what they are,” Morency said. “So the true impact really is unknown.”

Analysts attributed the higher costs to the HST.

“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 to investors.

“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 2% 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) 2% target.”

Many economists expect central bank governor Mark Carney will hike the policy rate one more time this year, likely at the next opportunity on Sept. 8, to 1% and then head back on the sidelines until 2011.

But analysts say July’s modest price gains give the central bank time to breathe before hiking interest rates.

“This just adds one more arrow into the quiver of reasons the bank may take a time out from further rate hikes this fall,” Porter wrote.

Added Krishen Rangasamy of CIBC World Markets: “The mild inflation report should give the Bank of Canada some comfort in toning down its language about its tightening bias as it contemplates taking a long pause after a September rate hike.”

The biggest increases were in energy prices, which were up 7.9% from where they were a year earlier. Within the energy price index, the cost of electricity rose 9.8% in July.

Transportation costs went up 2.7% in July, while gas prices were higher by 4.8%. As well as paying more for gas and vehicle insurance premiums, Canadians paid 1.7% more to buy vehicles in July.

The cost of housing also rose 2.9%. In addition to paying more for electricity, Canadians also paid more for natural gas.

Food prices went up 1.1%, with higher prices recorded in both restaurants and grocery stores.

Health and personal care products went up 2.8%. Recreation, education and reading materials went up 0.8% as Canadians paid more for cable and satellite services. However, the cost of home entertainment and computer equipment fell.

Only clothing and footwear registered lower prices in July.

Regionally, consumer prices rose in every province except Manitoba. Ontario registered the largest year-over-year increase as consumer prices rose 2.9%.

In British Columbia, consumer prices were also higher by 2%. Electricity prices increased by 36.7%. Prices at the pump and the cost to eat out also jumped.

Prices in Nova Scotia increased 1.7% in July.

Higher energy prices raised consumer prices by 2.1% in Newfoundland and Labrador, which had the second-highest inflation increase after Ontario. Unlike Ontario and other provinces affected by the HST, Newfoundland hasn’t changed its sales tax. Statistics Canada says higher energy costs are likely behind Newfoundland’s price hike.

“There are quite a few things,” analyst Daniel Cheung said.

“We talk about fuel oil and other fuels. It went up by quite a bit, like other provinces as well. Electricity went up. Food purchases from restaurants also went up.

“On the other hand, I think that they just don’t have as much downward pressure like other provinces. Obviously, I’m comparing to other Atlantic provinces, just because they’re in the same region.”

Consumer prices fell 0.3% in Manitoba in July after decreasing the month before. It cost less to buy gasoline, natural gas and home and mortgage insurance in the province.

Core inflation — which strips out several volatile components and consumption taxes such as the HST — came in at 1.6%, down one-tenth of a point from June.