Just because the loonie is trading near parity with its U.S. counterpart doesn’t mean Canadians should expect prices here to be similar to those south of the border, Statistics Canada says.
Rather, the “law of one price” across borders “is seldom supported in practice,” the agency said in new research published Wednesday.
“Prices in the two countries generally do not equate, nor do relative prices remain constant when there are movements in the exchange rate,” Statscan concluded.
The research arrives at a time when the comparison-shopping issue between the two countries is a hot topic of debate in Canada, following several months when the loonie and greenback have traded at or near parity. This has served to amplify the price differences for many items, particularly for those shopping online.
U.S. fashion chain J. Crew was singled out in the media when it launched its first store in Canada in August with prices that were 15 per cent higher than those in its U.S. outlets, plus fees on online purchases to cover duties. The chain quickly retreated and dropped the online duty charge. But price differences are also easy to spot for many items, ranging from automobiles to household staples such as plastic bags.
Finance Minister Jim Flaherty has challenged businesses to explain their higher prices and asked the Senate national finance committee to study the price gap. “Canadians are rightly irritated when they see large price discrepancies on the exact same products being sold on different sides of the border,” Mr. Flaherty wrote to the committee in September. “I share their irritation.”
In an interview, John Baldwin, director of Statscan’s economic analysis division, said prices in Canada do tend to move with exchange rates, “but not completely … primarily because prices are sticky. They tend not to move rapidly to adjust, due to all sorts of circumstances.”
As a result, Canadians over the past 40 years have tended to pay less relative to prices in the U.S. during periods when the value of the loonie was lower, and relatively more when the dollar appreciated, as has been the case in recent years.
“It’s not that prices don’t see any adjustment to exchange rate movement, but there tends to be a long lag, and only a partial adjustment,” said Avery Shenfeld, chief economist with CIBC.
Douglas Porter, deputy chief economist with BMO Nesbitt Burns, said if prices moved in line with exchange rates “we could have inflation of 20 per cent one year and deflation of 10 per cent in another.” That kind of volatility “is in nobody’s interest.
“I don’t think we can ever expect prices to be completely equal between Canada and the U.S.,” Mr. Porter added. “I do think the longer the currencies stay at parity, the narrower the gap will become – but it will take time.”
The Statscan findings confirm long-held views among economists about price differences between countries, owing to differing cost dynamics between two markets – such as transportation, population density and trade barriers – different domestic market dynamics and industry standards, and even bilingual labelling requirements.
“There is more to the retail price of a good than the price at the factory gate,” Mr. Shenfeld said. “By the time you look at the final retail price, there may be a lot of Canadian content” built into the final amount. “This is not as large a country as the United States in terms of population, so some costs become larger per customer in a smaller market.”