Canada’s Industrial Product Price Index (IPPI) increased 0.3% in May, mainly as a result of the weakening of the Canadian dollar against its American counterpart. The Raw Materials Price Index (RMPI) declined 7.2%, due primarily to lower crude oil prices.

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The advance of the IPPI in May followed a 0.4% increase in April. The IPPI continued its upward trend that began in November 2009.

The 3.4% depreciation of the Canadian dollar relative to the US dollar had a large influence on the IPPI advance in May. Prices of motor vehicles and other transportation equipment, which are particularly influenced by the exchange rate, were up 2.3% in May, the largest monthly increase since October 2008 (+8.2%).

Pulp and paper products are also sensitive to exchange rate movements. Prices for this product group rose 2.7% in May, the largest monthly increase since October 2008 (+5.3%).

Some Canadian producers who export their products to the United States are generally paid on the basis of prices set in US dollars. Consequently, the relative weakness of the Canadian dollar in relation to the American dollar had the effect of increasing the corresponding prices in Canadian dollars. If the exchange rate used to convert those prices had remained unchanged, the IPPI would have declined 0.6% instead of increasing 0.3%.

Chemicals and chemical products (+1.2%) as well as lumber and other wood products (+1.7%) contributed to the advance of the IPPI in May. The IPPI increase in May was dampened by lower prices of primary metal products (-2.9%) and petroleum and coal products (-2.3%), in part as a result of high inventories for these two product groups.

Excluding petroleum and coal prices, the IPPI would have increased 0.7% in May, the largest monthly increase since a 2.1% gain in October 2008.

12-month change
The IPPI was up 1.4% in May compared with the same month a year earlier, marking its first year-over-year increase since an identical gain in February 2009.

The increase in the IPPI over the past 12 months was led mainly by petroleum and coal products (+16.6%) and primary metal products (+12.0%). Other product groups made smaller contributions to the advance of the IPPI, including chemicals and chemical products (+4.2%) and lumber and other wood products (+6.4%).

Since May 2009, the Canadian dollar has appreciated 10.7% in value relative to its US counterpart. If the direct effect of the exchange rate had been excluded, the IPPI would have increased 3.9% instead of 1.4%.

The year-over-year advance of the IPPI in May was moderated by lower prices of motor vehicles and other transportation equipment (-5.6%), which posted its smallest decrease since October 2009. The year-over-year decline of this product group in May was largely a result of the appreciation of the Canadian dollar relative to the US dollar.

Between May 2009 and May 2010, the IPPI excluding petroleum and coal was down 0.1%, smaller than the 2.6% decline in April and the smallest drop since June 2009.

Raw Materials Price Index
The Raw Materials Price Index posted a 7.2% decline in May, after four consecutive monthly increases. This was the largest monthly drop since a 15.3% reduction in December 2008. This change in direction for the RMPI in May was mainly due to a 12.7% fall in prices for mineral fuels, particularly crude oil (-14.2%). Excluding mineral fuels, the RMPI would have decreased 1.5% in May, following gains of 0.4% in March and 2.0% in April.

A 6.1% drop in prices of non-ferrous metals in May also contributed to the decline of the RMPI, in part because of increased supply.

Prices of animal and animal products (+1.7%), ferrous materials (+1.5%) and wood products (+0.1%) increased in May, however, these increases had very little impact on the total RMPI.

From May 2009 to May 2010, raw materials prices rose 6.4%, the smallest year-over-year increase since November 2009, the month in which the current upward trend began. Crude oil prices (+10.2%) and non-ferrous metals (+16.4%) were the main contributors to the year-over-year RMPI advance in May. All groups posted increases except for vegetable products (-12.1%), non-metallic minerals (-0.6%) and wood products (-0.1%).