Canada-U.S. Price Gap: Higher Canadian Dollar Hasn't Helped Consumers, Data Shows

Many economists have argued that a strong Canadian dollar is good for the country, because it makes imports less expensive and therefore lowers costs for consumers and businesses.

But with the Canadian dollar hovering around parity with the U.S. dollar in recent years, many border-hoppers have been complaining that prices are obviously higher in Canada than in the U.S., and the benefits of a strong dollar haven’t been passed on to consumers.

Now, the latest data from the OECD offers proof that this is a real phenomenon. According to the organization’s updated figures, the purchasing power parity of the Canadian dollar was exactly the same in 2011, when the Canadian dollar was around $1 U.S., as it was when the Canadian dollar was worth 62 cents U.S. a decade ago.

In 2002 when the dollar was weak, it cost $1.23 Canadian to buy what $1 U.S. bought south of the border. Today, it still costs $1.23 Canadian to buy what one U.S. dollar buys in America.

“In other words, the loonie’s ascent has delivered no apparent improvement in purchasing power,” writes Erin Weir, an economist with the United Steelworkers’ Canadian office who first flagged the OECD data.

“The stronger loonie hasn't been able to overcome obstacles that include import tariffs ranging as high as 18 per cent, a number of higher fixed costs and, admittedly, the fact that retailers in Canada can simply get away with charging more,” the Canadian Press reported last fall.

The Bank of Canada estimates that Canadians on average pay 11 per cent more for goods than Americans, but the OECD study suggests that number may be closer to 23 per cent.

Growing frustration with high Canadian prices prompted a reaction from Finance Minister Jim Flaherty, who told a Senate committee he will look at reducing tariffs and using "informal persuasive powers" to bring down prices for Canadians.

The loonie’s meteoric rise over the past decade has largely been attributed to the rise in the price of energy, particularly oil. The Canadian “petro-dollar” has become a political hot potato recently, with Ontario Premier Dalton McGuinty taking heavy flak from Western Canadian premiers after suggesting the oil-linked dollar was hurting Ontario manufacturers, who are having a harder time exporting to the U.S.

"If I had my preferences as to whether we have a rapidly growing oil and gas sector in the West or a lower dollar benefiting Ontario, I stand with the lower dollar,” McGuinty said.

That prompted an angry response from Alberta Premier Alison Redford, who argued there is no such thing as a Canadian “petro-dollar.”

"We know how the value of the dollar works. It's in relation to an overall national economy,” she said. “The reason the Canadian dollar is high is partly because the United States has been going through some economic difficulties.”

And economists point out that, even without lower prices for consumers, there are plenty of benefits to Canada of a higher dollar. For instance, a rising dollar allows for lower interest rates, making housing and consumer loans more affordable. And the resource boom that arguably caused the high dollar has been very good for government revenues, allowing government spending to be higher than it otherwise would have been.

Original Article
Source: Huff
Author: Daniel Tencer