http://www.cbc.ca/money/story/2007/06/12/consumerdollar.html
Canadian consumers missing out on benefits of higher dollar: report
Canadian consumers haven't reaped any of the benefits of the rapid increase in the Canadian dollar rate, leading to higher inflation and growing pressure to raise interest rates in this country, a bank economist says.
The costs of a high Canadian dollar — more expensive exports and fewer manufacturing jobs — are well-known.
But what about the benefits?
In the past five years, the loonie has risen 50 per cent against the U.S. dollar. But Canadian prices for many goods sold in both countries haven't been adjusted to reflect the narrowing gap between the two currencies, according to a report by BMO Capital Markets deputy chief economist Douglas Porter.
"Retail prices in Canada have responded to the loonie's moon shot with all the speed and alacrity of a three-toed sloth on a hot summer's day," Porter said.
The most obvious example is the wide discrepancy in the prices of books and magazines. Paperbacks that sell for $9.95 in the U.S. are routinely priced at $12.95 in Canada — a 30 per cent premium that is far greater than the current seven per cent difference in the currency.
"The spread on book prices only stands out because of the ease of comparison," Porter says. "Many, many other products are at least as far out of whack."
Porter compared a number of products selling on both sides of the border. In a few cases, Canadians were not being overcharged. For example, Apple iTunes charges 99 cents for a song download in each country, so Canadian buyers actually get a break.
But in most cases, the Canadian buyer paid heavily for buying the product in Canada.
He cites the cost of a Honda Accord. It lists for $26,500 in Canada, but only $20,475 in the U.S. After taking the exchange rate into account, the U.S. Accord is 14 per cent cheaper.
A BlackBerry 8100 wireless device lists for $499 in Canada. Assuming an 88-cent US Canadian dollar, one would expect the BlackBerry to list for $439 US in the United States. But it actually lists for $399 US.
The study's comparisons were based on an 88-cent US dollar, even though the current exchange rate is closer to 94 cents US. But Porter acknowledges that prices can't be adjusted instantly to reflect the latest exchange rate.
Given the higher Canadian dollar these days, he says the price gaps between the two countries are even wider, meaning that prices in Canada should be even lower.
The price gap has serious policy and economic implications for Canada, Porter argues.
He says that higher prices have helped to boost Canada's core inflation rate to 2.5 per cent — the highest among the G7 countries. That inflation has, in turn, increased the pressure to boost interest rates.
"If consumer prices had reacted even a little more forcefully to the loonie's steep ascent, core inflation would be considerably closer to the [Bank of Canada's] two per cent target, and officials would not be openly warning that rates need to go higher," Porter said.
He also warns Canadian retailers that if the price gap remains as wide as it is, Canadians may take up cross-border shopping again.
