Canada's factory prices tumble

The rising Canadian dollar and falling metals prices knocked down Canadian factory prices by a steeper-than-expected 1.3 percent in June from May, Statistics Canada said on Monday. It was the second straight decline in producer prices, after a 0.5 percent drop in May, and was more than twice the 0.6 percent fall forecast by analysts in a Reuters poll.
In the year to June, prices rose 2.2 percent, compared with 3.1 percent in May. Raw materials prices climbed 0.6 percent in June, thanks mainly to rising crude oil prices, while the average forecast called for a 0.1 percent drop. The year-on-year rise jumped to 4.9 percent in June from 1.9 percent in May.
The price weakness relieved some of the inflation worries that led the Bank of Canada to hike interest rates earlier this month by a quarter point to 4.50 percent.
But analysts say the economy is still heating up fast enough to merit at least one more hike. "It's probably too early to send the all-clear signal on this inflation front, with the loonie suddenly losing some altitude, oil prices remaining lofty and global growth still chugging along," said Doug Porter, deputy chief economist at BMO Capital Markets.
Economists are now focused on the May gross domestic product report, due on Tuesday, which is expected to show sturdy monthly growth of 0.4 percent. Even though the robust Canadian dollar has helped soften price increases, most market players expect a second hike at the central bank's next monetary policy decision September 5.
"The strong currency is likely to contain the pace of increase in producer prices in the months ahead, but firm commodity prices and tightening capacity will likely keep policymakers worried about upward inflation pressures in the pipeline, said Dawn Desjardins, senior economist at Royal Bank of Canada. Lower prices for primary metals products, petroleum and motor vehicles helped reduce manufacturers' prices in June.
But much of the price tumble was explained by the 2.8 percent appreciation of the Canadian currency against the US dollar in June. Excluding the exchange rate effect, factory prices would have fallen 0.5 percent, Statscan said.
The ascent of the Canadian dollar came to an abrupt halt on Friday, and it continued to fall on Monday from a 30-year high reached last week. The currency was at C$1.068, or 93.63 US cents, in mid-morning trade, compared with C$1.0618 to the US dollar, or 94.18 US cents, at Friday's close.