How the Soaring Loonie Defies Economic Theory
Friday, October 12th, 2007
By Inya Ivkovic, MA for Profit Confidential
The loonie has reached parity with the U.S. greenback, and some experts even expect it to gain significant ground ahead of its “older” sibling. But that is old news. The manufacturing and forestry sectors are facing seriously declining revenues. Also old news. Consumer prices have finally started reflecting the loonie’s value. Wrong news. We only wish it were so.
Quite the contrary, even as the loonie is headed up into the stratosphere, consumer prices refused to budge from their surprisingly high levels. Moreover, prices were actually positively correlated with the rising loonie, increasing in aggregate 2.1% since January of this year, defying most laws of economic theory.
Who is to blame? Well, who profits the most from the rising prices, be it goods and services or the currency? In our case, those would be the retailers. However, let me unwind this story from the beginning.
As prices of imports are going down, along with production prices, it only makes economic sense that retailers would be able to offer cheaper goods and services. In their defense, we should say that retailers’ costs of goods sold have increased somewhat, although certainly not to the extent that would justify the current price levels.
To muddy the waters further, the soaring loonie is doing next to nothing to tame inflation. In theory, rising currency should curb exports, thus increasing domestic buying power and decreasing inflation. However, since lower domestic prices have never materialized, neither has the proverbial lid on inflation.
After years of living with higher prices on nearly everything, Canadians finally thought that the rising loonie would bring their wallets much-needed relief. As it turned out, the only ones enjoying the “weather” are those standing behind the cash register. As for ordinary consumers, perhaps an idea is to start buying stuff over the Internet or, if you can, even driving south of the border to do your shopping.
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Tags: economic analysis, stock market
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