U.S. producer prices experienced an unexpected 0.4% decline in November, surprising analysts who were looking for a much smaller slide.

The decline was the largest since a similar drop in May, reports BMO Nesbitt Burns. Excluding food and energy, core prices also surprisingly fell 0.3% last month. In the past 12 months, the PPI is still in positive territory, up 0.9%, while core prices are barely above water, reports BMO.

CIBC World Markets explains that the factors that led to October’s price jump, resulted in November’s price fall in the Producer Price Index. “The reintroduction of vehicle incentives that saw prices dive 3.6% to stand 1.7% lower than a year earlier, was an indication of consumers’ waning appetite for autos. In fact, excluding passenger cars the core index would have shown no change in November. With the increase in the core rate remaining at only 0.1% on a year-over-year basis, it is difficult to find much evidence of producer pricing power.” Also, a correction in energy prices, led by price declines for gasoline and heating oil, dragged down the energy component on a month-over-month basis.

CIBC says that “core PPI rates are still very tame, and any threat to the Fed is from deflation. That threat should entice the Fed to cut further at its March meeting as the manufacturing sector fails to find its footing.”

RBC Financial agrees that the price data confirms that little to no inflation pressures exist in the U.S., allowing the Fed free rein to hold interest rates down well into 2003.

Still, Nesbitt says, “This report does not change our view that producer prices are stabilizing, and are probably getting ready to rise. We do not view this as deflationary, as volatile car prices led the decline. Pipeline costs are leading indicators and the story there is definitely on the side of price firming, albeit from a very soft base.”

RBC also notes that U.S. inventories rose 0.2% in October after a 0.6% gain in September. Business sales rose 0.4% after falling 0.7% in September. “The resulting inventory-to-sales ratio dropped to 1.36 months from 1.37 months, as expected. The West Coast port dispute was a key feature dampening inventory building for the month, and inventories should climb further in the last two months of the year. This is expected to push Q3 slightly higher than the 4% currently on the books and will have an upward influence on Q4 GDP as well.”