Monetary policy watchers saw more evidence of the need for Bank of Canada tightening from Canadian producer price data released Thursday.

BMO Nesbitt Burns chief economist Sherry Cooper says that energy was the key factor behind the larger-than-expected 0.6% increase in Canadian industrial prices in February. The market expected a 0.4% gain.

“Excluding the impact of the 10.0% jump in energy, producer prices would have dropped 0.1% last month. A similar story also applies to the year-over-year results. If the 44.1% year-over-year increase in energy prices is ignored, producer prices would have been unchanged, rather than up 2.3%,” Cooper notes. “Energy prices received a boost last month from declining inventories, colder-than-normal temperatures, and the looming conflict in Iraq.”

Raw materials prices were also given a boost by energy in February, although the overall increase was a less-than-expected 3.1%. “Excluding the impact of mineral fuels (primarily crude oil), the rise in raw materials prices would have been just 0.1%,” Cooper says. “From a year ago, manufacturers paid 22.6% more for their raw materials, but prices were up just 4.8% year-over-year excluding energy.”

BMO says that while core producer price inflation was quite modest, some pressure may be building at earlier stages of the production process. “The year-over-year rise in ex-energy raw materials prices is reinforced by an 8.6% year-over-year increase in the cost of first-stage intermediate goods,” Copper says. “The global glut of spare capacity and the resurgent Canadian dollar helped keep a lid on core industrial product prices in February. However, there does appear to be some price pressure gathering at the earliest stages of the production process.”

RBC Financial Group says the pricing numbers will support the Bank of Canada’s case “to continue its efforts to reduce the amount of monetary stimulus flowing through the Canadian economy.”

“Certainly, rising energy prices have recently had a strong upward effect on producer prices on both sides of the border,” RBC says. “However, this is of notable concern to Canada given that its economy is already standing at the brink of capacity and that such rising pipeline prices could be easily passed through to the broader economy in such an environment.”