TORONTO – The price gap is closing between what Canadians and Americans are paying for the same goods, such as cars, books and lattes, thanks to the rapidly rising loonie and public outcry for parity at the checkout counter, a new report shows.
BMO Capital Markets economist Douglas Porter said the price gap for a select basket of items between the two countries is now 6.8 per cent, down from 18 per cent for the same items a year ago.
The loonie’s 20 per cent rise in the past five months, its strongest such run on record, is behind the narrowing spread, Porter said.
“By far and away, the biggest reason it has changed so much is the exchange rate,” Porter said.
His report, which compares prices of such items as saws, Wii consoles, computers, magazines and non-fat lattes at Starbucks, is based on a current 92-cent U.S. loonie. The Canadian dollar closed at 91.68 cents U.S. on Wednesday.
That compares to near parity with the U.S. dollar a year ago. Since then, the loonie has swung wildly, falling to 77 cents U.S. late last year. It peaked at $1.10 briefly in November 2007.
The average exchange rate in the first half of 2008 was 99.3 cents US., while the average for the past two year is about 92 cents US, Porter said.
The loonie’s rise in the past 18 months or so has put pressure on retailers to cut prices in line with what Americans are paying.
In the report, “Loonie’s Leap: Mind the (Price) Gap,” Porter said a latte at Starbucks is now cheaper in Canadian dollar terms compared to the U.S. However, a Michael Jackson CD set is still more expensive in Canadian dollar terms than south of the border.
Porter said the parity pricing issue went away when the loonie fell last fall, but is expected to resurface.
“If the currency keeps rising this could be an issue again and be another thorn in the side for retailers who have been dealing with a battered consumer and are only now just beginning to see a bit of a recovery,” from the recession, Porter said.
The loonie could hit parity again in the coming weeks, given the pace it has moved up now, and due to a weak U.S. economy that is weighed down in debt, Porter said.
“We’ve gone 20 per cent in less than five months, what’s another nine per cent from current levels. It is conceivable it could get there before the end of this year,” he said.
Noah Genner, chief executive of BookNet Canada, which tracks book sales, said prices fell last year as retailers offer discounts at the cash register to compensate for the higher sticker prices in Canada versus the U.S.
He said prices rose again when the loonie fell, but not to the same level as when the dollar was sitting around 65 cents U.S.
Genner said the loonie’s rise recently will likely put pressure again on retailers to cut prices.
“It the dollar stays high, or it goes up, we may see more of that,” he said.
While the rising loonie is good for consumers, economists also warn it could slow Canada’s economic recovery as it adds even more pressure such industries as manufacturing and forestry that sell products into the U.S.
“That is definitely a risk at this point,” said BMO’s Porter.
However, he doesn’t think the loonie will be enough to hold back an economic recovery in Canada.
“I think there are many other equally, if not more important, factors that will ultimately determine whether we recover or not. I think the strength of the currency might just act as a limiter of the recovery,” Porter said.
“Personally, I think the single most important thing is if the U.S. economy stabilizes and recovers. If the U.S. does recover, then it would take an enormous run up in the currency to thwart a recovery here.”