Canadian industrial product prices fell victim to the sharp run-up in the Canadian dollar, dropping 1.0% in June and defying expectations, which had called for a 0.3% increase.

It marked the fourth consecutive monthly decline, leaving industrial prices 2.7% below year-ago levels, the biggest 12-month drop in more than a decade. “Excluding the effect of the exchange rate, total IPPI would have declined by a mere 0.1% in June, and the annual change would have been a 1.2% increase,” said BMO Nesbitt Burns Inc. chief economist Sherry Cooper.

The industrial product index measures prices that producers in Canada receive. As a large exporter, prices for Canadian goods are often quoted in foreign currencies. “As such a strengthening in the Canadian dollar means that relatively fewer Canadian dollars are received in exchange for exported goods,” noted RBC Financial Group economist Ivana Rupcic.

Leading the decline over the month were lower prices for motor vehicles and other transport equipment (-2.1%), pulp and paper products (-1.8%), and primary metal products (-1.5%). On a year-over-year basis, motor vehicles and other transport equipment prices have fallen by 9.7%.

The only increase for June was seen in lumber prices, though only as a result of mill shutdowns; lumber prices have in fact fallen 7.9% from year-ago levels.

In contrast to the industrial product numbers, raw materials prices increased in June by 1.2%, though they too were just shy of the 1.8% expected increase. The rise here was solely a result of a 4.9% increase in oil prices, which offset moderate declines in each of the other categories.

Rupcic said that while the IPPI results were primarily a result of the stronger C$, “there appears to be some underlying weakness in today’s numbers. The fall in the producer price index seen since March alone, at -4.8%, is the largest in the series’ history, and points to a definite decrease in inflation pressures.

“This puts the Bank of Canada in a new position, one which we’ve already seen evidence of, that of supporting rather than stifling inflation.”

Cooper noted that the strengthening C$ has limited businesses’ pricing power and squeezed profits. “While industrial product prices may not experience as strong a currency effect in July, we expect to see the loonie strengthen further, putting further strain on Canadian companies.”