10/09/2013 02:11 EDT | Updated 01/23/2014 06:58 EST

Canada-U.S. price gap narrows as loonie's value falls: BMO report

OTTAWA - The price gap between what Canadians pay for a consumer item at home compared to what is paid across the border appears to be narrowing, but that doesn't mean Canadians are now paying less, a new report suggests.

The Bank of Montreal's latest price comparison of selected consumer items does show the differential has closed to about 10 per cent from 14 per cent in May 2012.

But chief economist Doug Porter notes that is almost entirely due the lower value of the loonie, which in recent weeks has dropped below parity and now hovers just over 96 cents US.

In terms of actual prices, they have largely remained constant as the loonie lost about four cents in comparison with the U.S. greenback, meaning the devalued Canadian dollar was able to increase its relative purchasing power.

"One of those lingering fundamentals is that the Canada-U.S. price gap remains locked in place, still drawing a phalanx of cross-border shoppers southbound from Canada," Porter says in the report, which compared prices in 10 broad consumer categories ranging from baby items to automobiles to electronics. The comparison was done in the past week.

The survey found the biggest gap on baby items, such as diapers, which averaged 34 per cent more in Canada than the U.S. Running shoes were 19 per cent more expensive, but the gap in car prices had fallen to six per cent from 10 in the last survey.

The price gap became a political as well as an economic issue about six years ago after consumers began to complain that while Canada's currency had at last achieved parity with the U.S., even briefly rising to $1.10 US, no such equality was evident in consumer prices.

Finance Minister Jim Flaherty asked the Senate to study the phenomenon, resulting in a report earlier this year that recommended Ottawa try lowering or eliminating tariffs on some consumer goods.

The March budget did cut tariffs on some sporting goods and baby clothes, but Porter said his sampling was too limited to show whether that had an effect.

Reports suggest the government may be preparing to do more on the issue, including extending the tariff cuts to electronics, as part of a plan to make consumers rights a key theme in next week's Throne Speech.

Porter said the problem won't be easy to solve. The Senate report pointed out several causes for the differential, including that suppliers often charge Canadian retailers more than their U.S. counterparts, something called "country pricing."

The report notes that even the entry of discount retailer Target to Canada appears to have had little impact on prices.

That's not to say there hasn't been some narrowing, said Porter. In September 2007, his sampling put the price gap at 24 per cent at a time the loonie was flying above parity.

"It takes time (for prices to move)," he said. "When we first did this, it would have taken about an 82-cent exchange rate to equalize a basket of goods and now we think it will take about an 88-cent exchange rate, so there has been some underlying narrowing over time.

"But it would be highly unlikely the gap would go away if we were at parity in the exchange rate," he added. "Wages are higher in Canadian dollars than they are in U.S. dollars, rents are higher, utility bills are higher, property taxes are higher, so a lot of the costs are in local dollars that won't adjust instantaneously with the movement in the currency."

Aside from the impact on consumer wallets, the price gap has exerted a major toll on Canada's tourism industry.

Porter notes than a decade ago, there were slightly more Americans visiting Canada than the other way around. Now cross-border traffic flows south by a ratio of three-to-one, and the tourism deficit hit — which was relatively small in the late 1990s — topped $18 billion last year.

"There are a few factors but I think you can put most of that at the feet of the exchange rate," he said. "Canada used to be a reasonable place to travel to, now it's an expensive place."