Industrial product prices fell 0.4% in November from October, and are now down 4% on an annual basis, Statistics Canada reported this morning. Conversely, raw material prices rose 1.5% during the month, mainly due to higher oil prices.

“While the soaring Canadian dollar continues to be the primary factor behind the slide in prices, even excluding the impact of the exchange rate, industrial prices would have only risen 0.1% in the month. That is a very subdued performance in light of the hefty increases in raw material costs in recent months,” says BMO Nesbitt Burns.

Nesbitt says that the 4% slide over the past 12 months is the steepest decline in almost 50 years of records. “Again, the record rise in the loonie is the big story here, although prices would be up a modest 1% y/y excluding the impact of the exchange rate. While industrial prices are not always a great leading indicator for consumer prices, it is quite clear that there is no pressure forthcoming on Canada’s CPI from the recent sprint in resource prices,” it says. “Producer price inflation is a non-issue in Canada, reinforcing the view that consumer price trends will remain subdued in 2004.”

“Falling industrial product prices means that pipeline inflation pressures are virtually absent,” counsels RBC Financial. “The Bank of Canada certainly has the room to lower interest rates at its January 20 meeting if it so desires, if it feels such a move will help offset the combined impacts of the BSE shock and the higher dollar. Most likely though will be a decision to hold rates steady and wait and see. In the near term the huge surge in the U.S. ISM index carries much more weight and has already caused a sizeable back-up in bond yields over the holidays. The Bank is likely to err in the market’s direction for now.”

http://www.statcan.ca/Daily/English/040105/d040105a.htm