Are Canadian and American inflation rates different?

Inflation, inflation, inflation. When inflation is bad, it’s the topic on everybody’s mind. But when inflation rates putter along like normal, you’ll rarely hear people discussing it over their morning coffee.

Either way, when inflation is a hot topic of conversation, people are mostly concerned about what’s happening in their own country—Canada included.

Just think about it: If prices at the fuel pump and at the grocery store are rising super quickly here in Canada, it’s hard to imagine that most Canadians are thinking about what’s happening economically halfway across the world.

However, when it comes to some economic issues, Canada often has a partner in its financial gains and woes: the United States. So that raises the question: Are Canadian and American inflation rates different?

The short answer is, yes, Canadian and American inflation rates are usually different. Although the economies of the US and Canada are intertwined, each country has its own factors that drive the relative rise and fall in consumer prices. In general, inflation rates in Canada and the US mirror each other, but they’re not carbon copies.

That said, inflation is a tricky subject to grasp. In this article, we’re going to take a closer look at whether or not the inflation rates in Canada and the US are connected and how they might differ.

Let’s get started.

Are Inflation Rates the Same in the US and Canada?

No, inflation rates aren’t usually the same in the US and Canada. While inflation rates tend to be similar in both countries, they’re not identical. There are many different factors that affect inflation in various regions around the world and even within North America.

For example, from May 2020 to May 2021, the inflation rate in Canada was approximately 3.6%. This is a substantial amount lower than the 5% rate of inflation that we saw in the US over that same time period.

That being said, while the specific inflation rate is normally different in the US than it is in Canada, the changes in the Canadian inflation rate tend to mirror the changes in the US inflation rate.

In other words, as the inflation rate rises in Canada, it often coincides with rising inflation in the US. This isn’t a perfect correlation, however, and we sometimes see that the rate of inflation increases or decreases much more quickly on one side of the border than the other.

All this is to say that inflation rates in both Canada and the US are often similar, but they’re rarely ever the same.

Why Are Inflation Rates Different in the US and Canada?

At this point, we know that inflation rates are normally different in Canada and the US. But why does inflation change differently on either side of the border, you might ask?

The answer to this question is very complicated. There are many, many factors that govern the rate of inflation in any given country.

Now, let’s take a look at some of the most important factors that impact inflation rates to help you visualize why changes in consumer prices might be different in the US and Canada.

Economic Cycles

One of the biggest long-term factors of inflation is the economic cycle. The term “economic cycle” is basically a fancy word that describes how global and regional economies fluctuate over time based on changes in their GDP (gross domestic product).

There are two main stages to the economic cycle: expansion and contraction. Between each of these stages, economies generally hit a peak (at the high end of economic expansion) and a trough (at the low end of economic contraction). As an economy changes from a peak to a trough, we can describe it as being in a so-called recession.

We often see that inflation rates decrease as an economy enters a downturn and nears a trough. This is mostly due to decreased demand for goods and services, which can lead to decreased prices. Alternatively, as an economy enters an upturn, we often see inflation rates increase as people spend more and prices increase.

To be clear, the connection between inflation and the stages that a country is in within its economic cycle is complex and we don’t always see high levels of inflation during an economic upturn.

But what we do know is that the US and Canada aren’t always in the same stage in their respective economic cycles. The economies of both countries are heavily intertwined, but they’re not the same. Ultimately, one country might enter a recession or experience an upturn before the other, which could affect their respective inflation rates.

Locally Significant Economic Events

For the most part, inflation is the result of natural economic cycles and it isn’t something that keeps most people up at night.

In fact, the government and the Bank of Canada actually try to keep the national annual inflation rate between a target range of 1 to 3%. Annual inflation rates between those numbers are rarely a major cause for concern.

However, things don’t always go according to plan and, sometimes, the national inflation rate is much, much higher than 3%. So what gives? Why would the Canadian inflation rate suddenly skyrocket?

The answer to these short-term inflation woes is often some sort of locally significant economic event. In other words, an event that causes a substantial disruption to a country’s economy and its GDP.

One of the best examples of such an event is the COVID-19 pandemic. Remember that at the start of the pandemic, many businesses were forced to shutter overnight and we saw massive issues with global supply chains.

These sorts of events can greatly affect the overall supply of goods and services, leading to rapidly increased prices due to the law of supply and demand. As a result, we get increased inflation.

Although the COVID-19 pandemic has had global economic consequences, even an international event like this pandemic affected Canada and the US in different ways. These different impacts can lead to different rates of inflation on either side of the border.

These inflation rate differences are even more apparent when economically devastating events occur on a more local scale. For example, if there’s a war or a natural disaster that has an outsized effect on the economy of the US and not Canada, or vice versa, inflation rates in each country could differ.

Government Price Regulation & Subsidies

When we talk about inflation rates, we’re generally referring to the rise of the cost of goods and services over time. In simpler terms, things cost more because of inflation. In a world with a true free-market economy, where prices rise and fall due to the laws of supply and demand and not government intervention, we would expect inflation rates to change as local supply and demand rates change.

However, Canada doesn’t exist in a true free-market economy and the US doesn’t either. While the prices of many things are determined primarily by supply and demand, the governments of both countries do intervene in their respective economies on a daily basis.

Much of this economic intervention from both countries’ governments comes in the form of price regulations (i.e., taxes and duties) and subsidies.

For example, the Canadian government offers substantial subsidies to the fossil fuel industry. It also offers a kind of subsidy on some consumer goods by offering zero-rated GST (goods and services tax) on basic groceries, prescription drugs, and other items.

By providing cash and tax breaks to certain industries or by removing GST from certain goods, the Canadian government can indirectly affect inflation. That’s because these government measures can reduce the prices of some goods and services, bringing inflation down in the process.

The US government also offers subsidies and tax breaks to various industries, but these government interventions are different from what we see in Canada. As an example, there’s no federal sales tax in the US (it’s determined by each state) like there is in Canada. The US government also subsidizes major industries using different strategies than we see to the north of the border.

These different government intervention strategies may not have a huge impact on short-term inflation in either country. But they are a contributing factor to the different inflation rates that we see over the long-term in both Canada and the US.

Methods of Measuring Inflation

Finally, it’s always worth considering the fact that there are different ways to measure inflation and that these different systems can affect the “official inflation rate” metrics that are used by the Bank of Canada and its US counterpart, the Federal Reserve.

The Bank of Canada primarily focuses on a metric called the total consumer price index (CPI) to determine the core inflation in the country. In the US, the official inflation rate is determined by the Bureau of Labor Statistics (BLS), which also has a metric called the consumer price index (CPI).

However, while the CPIs in both countries include similar factors and metrics, there are different formulas used to calculate the CPI in both the US and Canada.

For example, in the US, the primary CPI is calculated using the prices of 80,000 consumer goods and services in urban areas, which represent more than 90% of all Americans. The Bank of Canada looks at similar prices, but it weights its prices differently, and the prices it looks at aren’t exactly the same as what we find in the US.

Do these inflation measurement techniques have a huge impact on the different inflation rates that we see in Canada and the US? Probably not.

Though they are worth keeping in mind as you compare changes in inflation between not only the US and Canada but other countries. That’s because these measurement techniques can slightly skew the “official inflation rates” that you get from a country’s central bank.

Canadian vs American Inflation Rates: Similar But Different

The economies of both Canada and the US are closely connected but they’re not one and the same. While we see similar changes in inflation rates on both sides of the border, the exact rate of inflation that we see in Canada and in the US is usually different.

There are many reasons why these inflation rates differ, but they often have to do with things like economic cycles, government intervention, locally significant economic events, and different ways of measuring inflation. Even though you’ll likely see inflation rates rise and fall in both countries along the same timeline, consumer price trends generally differ on either side of the 49th parallel.