Manufacturers’ prices, as measured by the Industrial Product Price Index, fell in December (-0.4%) for the second month in a row.

The results came in below expectations of a 0.4% gain, but economists don’t see prices falling for long.

The IPPI remained high and prices were up 2.8% from December 2001, the highest year-over-year increase since May 2001.

According to Statistics Canada, this rise reflects a much stronger performance in the second half of 2002 than in the same period of 2001.

RBC Financial Group economists say the year-over-year increase is largely due to a strong contribution from petroleum and coal products. “On a monthly basis however, lower prices for motor vehicles and other transport equipment and pulp and paper products had a downward effect on the indicator,” it says.

BMO Nesbitt Burns notes that the strength of the loonie helped push down prices last month, as industrial product costs would have been flat if the exchange rate effect was excluded. It also points out, “Core prices were more muted on a year-over-year basis because much of the headline gains were due to strong energy prices, which were up 24.5%.”

It was also reported that raw material prices surged 4.2% in December, more than unwinding last month’s 2.9% fall. “Energy prices drove the monthly gain, rising 10.1%. The raw material price index is now up 17.6% from a year ago, as prices in every category have gained. Core raw material prices were up 7.8%, the strongest reading in over seven years,” Nesbitt says.

“Like their consumer counterparts, Canadian producers and manufacturers are also contending with rising prices. While the recent increase in the Canadian dollar against its U.S. counterpart will have a somewhat moderating effect on producer prices, inflationary pressures are evident and could garner even stronger attention should producers find a way to pass these costs up the production chain,” comments RBC. “Certainly, any “broadening of pricing pressures,” will indeed be the catalyst for the Bank of Canada to start hiking rates sooner than later.”

Nesbitt concludes, “While the weakening U.S. dollar took some of the bite out of industrial prices last month, the trend is still strengthening.”