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Shoppers enter the Target store in Dartmouth, N.S., on Black Friday.ANDREW VAUGHAN/The Canadian Press

The Bank of Canada says deep discounting by retailers is spreading disinflation – a byproduct of more consumers crossing the border to shop and the arrival here of U.S. chains such as Target Corp.

The central bank left its key overnight interest unchanged at 1 per cent Wednesday, citing a heightened risk of even lower inflation. The bank blamed excess supply in the economy and heightened competition in the retail sector, which it said are proving to be "more persistent than anticipated."

Canada isn't yet facing deflation – outright falling prices. But inflation is now running disquietingly below the Bank of Canada's 2-per-cent target, and outside its acceptable range of 1 to 3 per cent. Consumer prices rose at a meagre annual rate of just 0.7 per cent in October, and economists expect inflation to remain similarly dormant in the months ahead.

The Target effect has put pressure on retailers to keep a lid on price increases – or even lower some. U.S. discounter Target invaded Canada in March, opening 124 stores by last month.

And while Target has failed to perform to its expectations, its presence raises the heat on rivals in a sluggish merchandising market in which cross-border shopping is still a big allure. Compounding those pressures, low-cost Wal-Mart Canada Corp., a division of the world's largest chain, is expanding in Canada.

Even as Wal-Mart steals market share, lower prices are taking a toll. Sales at stores open a year or more slipped 1.3 per cent in the third quarter.

Other transplanted U.S. retailers are feeling the pressure to drop prices. Fashion purveyor Express Inc., which reported disappointing Thanksgiving and Black Friday sales Wednesday, has been lowering its prices to parity levels with those in the United States. "You can't build in enormous, enormous unit sales at prices that are really cheap," said Express chief executive officer Michael Weiss.

Apparel retailer Reitmans (Canada) Ltd. is also feeling the squeeze. "The retail environment remains challenging with increased competitive pressure for apparel retailers," the company said Tuesday after lacklustre nine-month results. Sales dropped 3 per cent at stores open a year or more, which is a key retail metric.

In the grocery sector, prices so far this year rose just 1.2 per cent – less than expected – and are forecast to pick up only a tad higher – about 1.4 per cent – in 2014, according to a University of Guelph study this week.

Relatively "fat" retail margins are being squeezed, both by the arrival of major U.S. retail chains and efforts by retailers to prop up sagging retail sales, according to Bank of Nova Scotia economists Derek Holt and Dov Zigler. "Witness the Americanization of Canadian retailing as Black Friday sales have crept across the border," Mr. Holt and Mr. Zigler pointed out in a research note.

As retailing becomes more Americanized, major chains are also turning more to coupons, said Albert Bitton, president of the Canadian Deals & Coupons Association. U.S. coupon companies increasingly are entering Canada: This year, the largest online coupon player, RetailMeNot, launched in Canada; last year EBates's cash-back site came here; Google is looking to roll out its Zavers grocery coupons in this country in 2014, he said.

Retailers in Canada quietly participate in the couponing. although "they're not comfortable talking about it," Mr. Bitton added.

The falling dollar, however, could provide an antidote to the deflation threat. Big retail discounts are great for consumers, but the persistent absence of upward prices is an economy-killer because it causes people to hoard cash. The Canadian dollar dropped below 94 cents to 93.6 cents (U.S.) Wednesday – its lowest level since May, 2010.

Some economists say a lower dollar may be exactly what Bank of Canada Governor Stephen Poloz is trying to orchestrate by hinting at lower rates. "The bank is ... adding fuel to recent weakness in the Canadian dollar, perhaps intentionally so," said Avery Shenfeld of CIBC World Markets.

Bank of Canada officials have fretted in recent months that exporters are losing competitive ground in the world as the dollar has hovered just below par since 2008. A lower dollar makes consumer products more expensive because most are imported.

Follow Barrie McKenna on Twitter: @barriemckennaOpens in a new window
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