Canadian price gap with U.S. widens to 20%

Canadian consumers are paying about 20% more on a selection of goods than their counterparts in the U.S., despite the strength of the loonie that should have helped curb prices here, according to a BMO report.

That gap has widened from 7% in the summer of 2009 when the bank’s economists last studied the issue.

“That more moderate inflation performance versus other countries is overwhelmed by the surge in the currency,” BMO deputy chief economist Doug Porter wrote in a report. “As a result, the cost of a basket of goods, adjusted for today’s exchange rate, has bolted higher again in Canada relative to the U.S.”

The loonie has now risen 30% from its levels of two years ago, fuelled by investors seeking the stability of Cananda’s financial system and booming demand for the nation’s commodities. BMO warned the lofty loonie is also likely to be here to stay and will remain above parity through 2012 and beyond.

“The reality is that prices are slow moving beasts that do not move quickly and that’s the way the Bank of Canada likes it,” Porter said, adding that we are likely to see some narrowing in the gap if the currency remains strong, but not complete closure.

“The U.S. is an incredibly competitive retail market,” he said. “Also our cost bases are rising.” BMO found that Canadians on average pay 20% more for magazines. We pay 28% more for a blu-ray copy of “The King’s Speech,” while a pair of running shoes may cost as much as 48% more, it said.

“We won’t see the affects of the strong loonie reflected for some time,” said Professor Ken Wong of Queen’s University. “It will take time for inventory levels to adjust.” A Mezzaluna chopper costs about 34% more, Gap cargo shorts are 15% more expensive and pro-golf balls are 11% more, it found. 

BMO did point out some upside to the soaring loonie. It may be helping to keep interest rates low amid concern tightening borrowing costs will result in an even stronger currency. That said he also doubted prices would ever be comparable given the differences in the markets and the transport and other costs associated with bringing goods into Canada.

It also helps support businesses investing in new equipment and machinery by slashing the cost of imported goods, though there’s no guarantee that will result in higher productivity, it said.