The introduction of harmonized sales taxes in several Canadian provinces pushed up inflation in July, though not to the extent that economists had expected.

Statistics Canada said the annual inflation rate rose by 1.8 per cent last month, an increase of eight-tenths of a point from June.

BNN's Michael Kane said an increase had been expected by everyone who watches the markets.

"The HST, because it gooses prices up a little bit, obviously the rate is going to go up," he told CTV's Canada AM on Friday morning.

Nova Scotia's existing harmonized sales tax was increased by two percentage points in the same month that Ontario and B.C. introduced their own similar taxes.

Doug Porter, the chief economist at BMO Capital Markets, said the new taxes in two of Canada's biggest provinces had the most significant effect on inflation.

"The start of the harmonized sales tax in B.C. and Ontario last month was the dominant factor here," Porter said 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 per cent is quite remarkable."

But Porter said "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 per cent target."

In terms of individual changes in prices, Statistics Canada said energy prices were 7.9 per cent higher than they were a year before. And Canadians were paying 9.8 per cent more for electricity. Natural gas prices were also up.

Transportation costs advanced by 2.7 per cent and gas prices increased 4.8 per cent. It also cost 1.7 per cent more to buy a vehicle in Canada. The cost of housing was up 2.9 per cent.

In the case of food prices, Canadians were paying 1.1 per cent more for food, seeing increases whether they ate at home or in a restaurant. Statistics Canada said health and personal care products cost 2.8 per cent more than they did, while recreation, education and reading materials jumped by 0.8 per cent.

Changes in core inflation

The national statistics agency also released its core inflation figure Friday, which excludes the eight most volatile components as well as the taxes that were just introduced. It advanced by 1.6 per cent in the 12 months to July, compared to the 1.7 per cent rise recorded in June.

Kane said Canada's central bank watches the core inflation rate closely when evaluating whether or not to change interest rates.

"When they are calculating whether they should make a move on rates or not, they are focused firmly on the core and they are keeping to their forecast that the rate of inflation will stay more or less close to the target area, if not a little softer," said Kane.

The long-term problem to watch for is if Canada gets into a deflationary period where asset values decline.

While Canada is not close to a deflationary period, the United States "is very close to being in a situation like that," said Kane.

"And if there is a knock-on effect, we could feel it sometime later."

The sense in Canada's business community is that the Bank of Canada could go either way when it comes to raising interest rates this fall, Kane said.

"Believe it or not, the street is 50-50 split on this. It is totally ambiguous, there is no consensus on whether the Bank of Canada will or will not move in September."

With files from The Canadian Press