The U.S. Producer Price Index showed continued weakness in November, dropping 0.6%.

The drop was bigger than economists expected, “reinforcing firms’ lack of pricing power eight months into the recession,” according to BMO Nesbitt Burns. “The downtrend in pricing power is also evident as producers now receive 1.1% less than they did a year ago.” CIBC World Markets said downward trend is likely to continue as global demand weakens.

Both food and energy prices contributed to the decline. Core prices rose 0.2% last month, in part due to a tax-induced 1.8% jump in tobacco prices. There little in the way of inflation further down the production chain, says BMO, as core intermediate and crude prices dipped 0.2% and 0.8% respectively.

“Today’s retreat in producer prices suggests a friendly CPI report tomorrow,” says CIBC. “And while this report confirms that inflation remains well contained, the broad price weakness signals poor profit margins for US manufacturers. The ongoing erosion in domestic and external demands looks to also keep a lid on core prices. The sustained absence of goods price inflation remains a bullish backdrop for bonds.”

BMO concludes, “Producer prices remain consistent with the view that inflation trends in the U.S. remain tilted toward the downside. With the trend in firms’ pricing power still in decline, cost controls will invariably continue to weigh on employment. This report did nothing to suggest an end to the weak labor market or to prevent the Fed from easing rates at the end of January.”