Canada's annual inflation rate increased to 1.8 per cent for July, boosted by the HST, after a one per cent rise in June.

Prices were affected by the 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 up 2.9 per cent from a year earlier after June's 1.6 per cent increase. Prices for gasoline, electricity, and passenger vehicle insurance premiums went up, and consumers also paid more for homeowner's replacement costs.

In B.C., consumer prices rose two per cent for the 12-month period to July after a 0.5 per cent increase in June. Consumers saw a 36.7 per cent price increase in the cost of electricity, while restaurant prices increased 7.5 per cent.

Below forecasts

However, the overall report was softer than economists had been forecasting. Expectations were for the annual inflation rate to come in between two per cent and 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 below economists' 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.