November 19, 2013 / 11:59 PM / in 4 years

UPDATE 1-Canada-U.S. price gap not due to market failure-Bank of Canada

OTTAWA, Nov 19 (Reuters) - The fact that some retail goods are cheaper in the United States than in Canada, a sore point for Canadian consumers, is not due to a market malfunction, a senior Bank of Canada official said on Tuesday.

In a speech, Bank of Canada Deputy Governor John Murray outlined several reasons for the cross-border price gap.

“While significant price discrepancies exist, the reasons for them can largely be explained and are not evidence of serious market failure,” he said in the prepared text of a speech he was giving in Sackville, New Brunswick.

“Market forces are at work and are generally pushing prices and the exchange rate in the right direction.”

The Canada-U.S. price differential emerges periodically as a source of outrage for consumers and has even led the federal government to study the possible unilateral removal of trade tariffs to help close the gap. Canadians frequently cross the border to take advantage of bargains in U.S. shopping malls.

The issue becomes particularly acute when the Canadian dollar is at or near parity with the U.S. dollar, leading many to believe prices should also be equal.

Higher Canadian transport costs, trade barriers and other competitive issues can explain some of the price differences, Murray said, adding that for much of the past 30 years, Canadian consumer prices were actually lower than in the United States.

Recent research at the Bank of Canada helps to explain why a stronger currency does not necessarily result in lower prices in Canada, Murray said.

One study shows that the exchange rate is more effectively passed through to prices when imported goods are invoiced in the producer country’s currency and when they are shipped directly from the producer country rather than through a third country.

The second study, which looked at data for Japan, the United Kingdom and the United States, found that larger-than-normal gaps between domestic and foreign prices can be used as a predictor of future exchange rate movements.

Murray made no reference in his speech to the Bank of Canada’s current monetary policy stance.

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