May 12, 2008 / 12:31 AM / in 10 years

Canadian shoppers see some gains as C$ holds firm

TORONTO (Reuters) - Canadian shoppers still pay more for many retail goods than U.S. shoppers do, but the wide price gap has narrowed considerably since the Canadian dollar rose to match the U.S. one last year.

<p>Canadian one dollar coins, also known as loonies, are displayed in Montreal, September 19, 2007. Canadian shoppers still pay more for many retail goods than U.S. shoppers do, but the wide price gap has narrowed considerably since the Canadian dollar rose to match the U.S. one last year. REUTERS/Christinne Muschi/Files</p>

Responding to customer complaints, many retailers in Canada have lowered their prices toward the U.S. ones, a boon for both shoppers and policy makers. Customers agree that many goods are costing less, and the Bank of Canada can worry less about inflation as certain retail prices fall.

But analysts say there will never be retail price parity to match the almost-parity between the two currencies on foreign exchange markets. Canadians face different sales and import taxes, and some prices will always be different.

“There’s not exact parity between the two (retail prices) but it looks like there’s enough movement on those fronts to quell the fires of protest,” said Doug Porter, deputy chief economist at BMO Capital Markets.

Last September, the Canadian dollar climbed to parity against the U.S. dollar for the first time in more than 30 years. It has stayed around that level for most of the time since, excluding a brief leap to around US$1.10 in November, when one U.S. dollar was worth around 91 Canadian cents.

Porter calculated that Canadian prices were 24 percent higher than U.S. prices on identical goods last September, a discrepancy that prompted consumer grumbles and large numbers of shopping trips to U.S. outlet malls.

His latest research puts the gap at roughly 15 percent.

Porter said factors like higher wages, rent, property tax, and to some extent sales volume, have to be taken into account as well as exchange rate movements.

The retail price cuts in Canada have affected both smaller items such as books, clothing and electronics and bigger-ticket purchases such automobiles, where prices were 7.1 percent below year-ago levels in March, the biggest price drop in 50 years.

But Canadian retailers say a long list of obstacles prevent them from matching prices, including higher shipping costs and gas prices and rules that say labels must be in both English and French, Canada’s two official languages.

There are also import taxes, and policy decisions by multinational brand owners not to match a U.S. price.

“To import a pair of running shoes from China, a retailer pays an import tax of about 18 percent on that item. A U.S. competitor pays zero,” said Derek Nighbor, Senior Vice President of National Affairs for Retail Council of Canada.

Tom Gauld, chief executive of auto parts and household goods retailer Canadian Tire, said the company had passed on most of its savings from the stronger Canadian dollar.

“I think part of the necessity we have over the last several years has been passing on almost everything in the exchange rate into our pricing,” Gauld told Reuters after the company’s annual meeting on Thursday.

“The other thing we’ve been doing is trying to keep our prices low. Quite frankly more and more of the product is being bought overseas and it is considerably less expensive in many of the product categories to have to purchase it offshore and bring it back to Canada.”

Porter said the retail price cuts were contributing to Canada’s low inflation. Consumer prices rose 1.4 percent in the year to March, higher only than Japan among major economies.

Editing by Janet Guttsman

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