Strong Canadian dollar moderates producer prices

OTTAWA (Reuters) - The strong Canadian dollar helped dampen producer prices in January, data showed, but economists downplayed the currency’s role in suppressing inflation and therefore stalling official interest rate hikes.

The industrial product price index (IPPI) rose 0.2 percent in January from December, Statistics Canada said, well below the 0.6 percent rise that markets had expected and the smallest gain since July.

The price of goods as they leave the factory is believed to have limited impact on the consumer price index, the gage the Bank of Canada uses when setting interest rates and which includes some imported goods and other items.

“This index is very volatile so you can’t really peg it down to Canadian dollar strength,” said Kam Bath, an economist at RBC Capital Markets.

“If you focus on the prices of motor vehicles and transport equipment ... you could definitely make that conclusion,” he said.

In a nation that relies heavily on exports to the United States, the exchange rate is expected to keep prices tame for some of the biggest industries such as the auto sector.

The motor vehicles and transport sector accounts for nearly a quarter of the weighting in the IPPI. Statscan said the sector saw prices drop 0.8 percent on the month, mainly due to a 1.4 percent appreciation of the Canadian dollar.

The overall IPPI would have risen 0.5 percent excluding the effects of the exchange rate, it said.

Transportation is the second weightiest component of the consumer price index, although in that case it includes gasoline prices as well as vehicles.

“We believe that the pass-through effects of producer prices into the CPI basket will be limited, particularly further along the distribution chain,” said Gorica Djeric and Derek Holt of Scotia Capital.

The Bank of Canada, which targets 2 percent annual inflation, held its key rate steady at 1 percent on Tuesday and gave no sign it would resume tightening any time soon.

Low inflation, helped by the strong currency, appears to be one reason the bank is in no rush to raise borrowing costs, despite hefty fourth-quarter growth and worries about households taking on too much debt.

The Canadian dollar gained 5.7 percent against the U.S. currency last year and has been trending upward in 2011, hitting its highest level in more than three years this month. Earlier on Wednesday it was at C$0.9727 to the U.S. dollar, or $1.0281. Median forecasts in a Reuters poll released on Wednesday show the high-flying currency will ease to C$0.98 to the U.S. dollar in one month’s time and gradually weaken to parity with the greenback a year from now.