Bank of Canada governor Mark Carney gave many reasons why Canadian retail prices are often higher than American prices, but he thinks some relief may be on the way, thanks to the expansion of new American retailers into Canada.

Carney was testifying Wednesday night before a Senate committee studying the difference between the cost of goods in the two countries.

He explained that pricing is complicated, with many factors playing a role including:

  • taxes.
  • higher sales and larger markets in the U.S.
  • labour costs.
  • productivity gaps.
  • transportation costs, which in Canada include both gas taxes and a vast area to cover.

Even if the Canadian dollar rises in value compared to the U.S. dollar, retailers still have to pay many of these costs in Canadian dollars, he said. That means they don't save as much as consumers may think just by looking at the exchange rate.

"The greater the value-added in Canada to a good or a service, the smaller the role played by the exchange rate in its price," Carney told senators on the national finance committee.

But there is some good news for Canadian shoppers: Carney says American retailers are considering adding "fairly significant" retail space in Canada.

"I know in our conversations with Canadian commercial real estate players, with Canadian retailers, and conversations we’ve had south of the border, it is not lost on the retail sector that the per square foot return in Canada is higher now than it is in the United States," Carney said.

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"These are businesses, they are looking for opportunities, there is opportunity north of the border … and we're underserved, relative to the U.S., in terms of retail space."

The Bank of Canada estimated the price gap between the two countries at 11 per cent in September 2011, compared to 18 per cent in April 2011. Carney cautioned, however, that the estimates are based on a handful of categories in the Consumer Price Index, as well as on an informal survey done by the bank, so there's "some uncertainty" around them.

The Senate committee is studying price differences between Canada and the U.S. following a letter from Finance Minister Jim Flaherty suggesting it look at the issue.