Canadian industrial product prices fell victim to the stronger Canadian dollar, dropping by a larger-than-expected 2.0% in May, the third monthly decline in a row.

Industrial prices are now down 1.7% year over year.

“Cheaper energy played a role, but the overwhelming force behind May’s industrial deflation was the rising value of Canada’s currency,” says a report by CIBC World Markets. “A stronger C$ accounted for three quarters of the overall monthly price decline, as it sees global U.S. dollar prices for commodities translated into fewer Canadian dollars.”

BMO Nesbitt Burns also noted that the strong Canadian dollar has had “a major dampening effect on prices.” BMO calculates that last month’s drop would have been only 0.5% without exchange rate effects. Prices would be 1.6% above year-ago levels if the loonie’s rise were excluded.

Also, raw materials prices fell 2.5% in May. “A slightly larger-than-expected tumble,” says BMO chief economist Sherry Cooper, “taking the annual change into negative territory for the first time since last June. Energy prices were once again the main culprit, as ex-energy raw materials prices fell 1.5%, and are up 1.3% year over year. Like IPPI, price declines were pervasive, with only non-ferrous metal prices rising last month.”

CIBC suggests that the “plunge in industrial prices is part of the backdrop for what we expect will be a big earnings hit in the materials sector this year from the C$.”

“The soaring loonie is keeping a lid on pipeline price pressures and taking pricing power out of the hands of Canadian companies,” Cooper said. “This report helps confirm that inflation pressures are abating, and, combined with the decline in April GDP, could revive talk that the Bank of Canada will consider easing rates.”