CPI All Items (YoY)

Canada vs US CPI inflation: a much smaller gap than the M2 gap predicted

For most of 2024 and 2025, Canadian and American headline CPI inflation moved within a percentage point of each other, with both lines converging back toward their respective 2% targets in early 2026. This is genuinely surprising. The two countries ran very different fiscal responses through COVID, very different monetary trajectories on the way down, and very different mortgage transmission channels — yet the outcome in CPI terms has been quietly similar. Most of what makes the two lines different is methodology, not underlying inflation.

For the indicator definition (year-over-year change in the all-items consumer price index, StatCan and BLS basis) see the CPI All Items YoY indicator page. This page is about the Canada–US gap, why it is small, and where it isn't.

The numbers

From the monthly YoY series shown above:

• Canada, June 2022 peak: about 8.13%
• United States, June 2022 peak: about 9.06% — roughly one percentage point higher
• Canada, average over the full series: about 2.23%
• United States, average over the full series: about 2.58%
• Canada, January 2026: about 2.29%
• United States, January 2026: about 2.39%

A consistent feature: the US peak was higher, the US average is higher, and the gap has narrowed close to zero in early 2026. Both central banks describe true underlying inflation as roughly 2.5%, with the headline 2% reading concealing a stickier core.

Why the US peak was higher

The most rigorous explanation comes from the San Francisco Fed Economic Letter "Why Is U.S. Inflation Higher than in Other Countries?" (Jordà, Liu, Nechio, and Rivera-Reyes, March 2022). Their cross-country accounting estimated that US fiscal transfers added roughly 3 percentage points to inflation by Q4 2021. The American Rescue Plan (March 2021) was the dominant single factor — $1,400 cheques landed in household bank accounts during the supply-constrained reopening.

The Larry Summers vs Janet Yellen public debate from February 2021 became famous in retrospect. Summers, then a Harvard professor and former Treasury Secretary, warned that the ARP was too large and would generate inflation pressure that would outlast the pandemic. Yellen, then Treasury Secretary, defended the package as necessary insurance against a slow recovery. The subsequent inflation arc largely vindicated Summers's call, and the SF Fed paper put a number on it.

The Canadian fiscal response was smaller and faster-tapering. CERB at $2,000/month had a finite envelope and was wound down in 2020. Canada did not run a 2021-style stimulus cheque program of comparable magnitude. The smaller fiscal impulse is the leading explanation for Canada's roughly 1-percentage-point lower peak.

Why the headline gap is smaller than you'd expect

You might expect a Canada-US inflation gap that tracked the money supply M2 comparison, where the US grew M2 much faster than Canada from 2020 to 2022. It didn't. The gap is much smaller for several reasons:

1. Excess savings absorbed gradually: both countries built large household excess savings; consumers spent them down over years rather than weeks.
2. Tradeable goods deflation in 2023–2024 as supply chains normalized — symmetric in both countries.
3. The US shelter lag: the largest weight in US CPI is housing, and BLS samples leases on a 6-month rotation, so CPI rent and Owners' Equivalent Rent lag new-lease market rents by 12 to 24 months. NBER Digest research (October 2025) using the Zillow Observed Rent Index estimated nearly two-year pass-through. That smoothed the US peak downward at the expense of stickiness in 2023 and 2024.
4. The Canadian MICI methodology worked in the opposite direction (see below).
5. The 2025 carbon-tax removal subtracted about 0.7 percentage points from Canadian YoY CPI for one full year (also see below).

The bottom line, articulated by Macklem in his December 2024 Vancouver Board of Trade speech "Lessons for the future," is that the inflation episode was driven primarily by sectoral demand-supply imbalances and tradeable-goods shocks rather than aggregate money growth. That framing predicts a small headline gap, and that is what showed up in the data.

The MICI head fake

There is one large methodological asymmetry that deserves its own section because it affects how you should read the chart. Canadian CPI includes a Mortgage Interest Cost Index (MICI) component that mechanically rises when the BoC hikes rates. The US CPI does not include any equivalent — the BLS uses Owners' Equivalent Rent instead, which tracks rents rather than mortgage payments.

In the latest Statistics Canada basket (2025 update, based on 2024 expenditures):

• Mortgage interest cost is approximately 5.65% of basket weight.
• Rent is approximately 7.19%.

In 2023 and 2024, when the BoC was holding the overnight rate at 5%, MICI alone was adding 1+ percentage points to Canadian headline CPI. The intuition is the wrong way around: the central bank's rate hikes were raising the headline inflation it was trying to lower, in the short run. As the BoC cut from the peak, MICI started to fade out of the headline number for the same mechanical reason. TD Economics' James Orlando has called this Canada's "shelter inflation problem," and it is the single largest source of methodological noise in Canada–US CPI comparisons through 2023–2024.

The implication for reading the chart: in 2023 and early 2024, Canadian headline CPI looks higher than it "really" was once you strip out MICI. From late 2024 through 2025, the same effect runs in reverse and Canadian headline CPI looks lower. Both adjustments are real but methodological, not underlying inflation.

The 2025 carbon-tax dent

On April 1, 2025, the federal consumer carbon price was removed by the Carney government (the policy commitment was made during the leadership campaign in March 2025). The Conference Board of Canada and the Bank of Canada's April 2025 MPR both flagged the size of the dent: the removal subtracted about 0.7 percentage points from Canadian YoY CPI for one full year. By April 2025, gasoline was down 18.1% YoY and natural gas was down 14.1% YoY almost entirely on the basis of the carbon price removal. CPI dropped to 1.7% in April 2025 — well below the 2% target — even as core measures actually rose in the same month.

If you mentally add 0.7 percentage points back to the Canadian line for the year following April 2025, the Canada–US gap actually widens slightly. The convergence-near-2% story for 2025 was partly a carbon-tax artifact; the underlying inflation comparison is stickier than the headline numbers suggest.

Tariff inflation: now an asymmetric story

Trump's 2025 tariff package (25% on most Canada/Mexico goods, 10% on Canadian energy, 20% on China) is the largest single inflation shock in either country since 2022, and it is largely asymmetric. It hits the US directly through goods import prices and only partially hits Canada (which faces a smaller and offsetting demand shock). The Peterson Institute estimated that the Canada+Mexico+China package costs the typical US household roughly $1,200 per year. JPMorgan's macro team estimated tariff effects could add roughly 1.0–1.5% to US PCE inflation in 2025, mostly in the middle quarters. Realized retail pass-through on tariffed items reached approximately 5.4% by April 2025, contributing roughly 0.7 percentage points to US headline CPI.

Goldman Sachs's 2026 outlook flags the asymmetry explicitly: tariff fade in 2026 should subtract approximately 0.3–0.4 percentage points from Canadian core inflation, which is a small Canadian benefit relative to the larger US drag. JPMorgan's headline forecast for US core CPI in 2026 sits at approximately 3.2%, which would push the Canada–US gap back open in Canada's favour over the next year.

Core measures: stickier than the headline

Both central banks have flagged that headline 2% is masking a stickier underlying picture:

• Bank of Canada CPI-trim: about 3.0% YoY in October–December 2025
• Bank of Canada CPI-median: about 3.1% YoY in October–December 2025
• Cleveland Fed Median CPI: about 3.1% YoY in November 2025
• Cleveland Fed 16% Trimmed-Mean CPI: about 2.9% YoY in November 2025

The C.D. Howe Monetary Policy Council's December 2025 statement explicitly flagged the divergence between Canadian headline 1.9% and core measures at 3.0–3.1% as the reason it recommended the BoC hold the overnight rate at 2.25% for the next year rather than cut further. The Fed's December 2025 SEP showed core PCE at 3.0% in 2025 and forecast 2.5% in 2026, with the dot plot pricing in modest cuts from current levels. Powell's October 29, 2025 press conference flagged "nonmarket nonhousing services" as the residual stickiness category in US CPI.

Wage-price dynamics

US Employment Cost Index (Q4 2025): +3.4% YoY for civilian compensation, +3.3% for wages and salaries. Canadian average hourly wages: approximately +3.3% YoY in Q3 2025. The two countries are running essentially identical wage growth, which is one of the strongest reasons to think the underlying inflation processes are similar even when the headline lines diverge for methodological reasons.

Carolyn Rogers and the mandate review

Senior Deputy Governor Carolyn Rogers's October 9, 2025 speech and subsequent press conferences have flagged that the BoC is rethinking inflation measurement as part of the mandate review now underway, with explicit attention to whether MICI should be excluded from the preferred core measures. Macklem has separately ruled out moving the 2% target itself, telling audiences in February 2025 that "now is not the time to question the anchor." The mandate review is due to conclude in 2026 and any methodology changes would be the most significant CPI revision in roughly a decade.

What to watch in 2026

1. Monthly CPI prints from StatCan (third week of the month) and BLS (mid-month). The single highest-frequency comparison.
2. CPI-trim and CPI-median vs Cleveland Fed Median CPI and 16% Trimmed-Mean CPI. The core comparison is more meaningful than the headline comparison.
3. The 2026 BoC mandate review conclusion. Any methodology change to MICI would meaningfully shift the historical comparison.
4. Tariff pass-through evolution. Goldman's 0.3–0.4pp Canadian benefit and JPMorgan's higher US 2026 core CPI forecast both imply the Canada–US gap should reopen modestly in Canada's favour through 2026.
5. Wage growth divergence. If Canadian and US wage growth start to diverge, the underlying inflation paths will likely follow.
6. Carbon-tax base effect rolling off. From April 2026, the 0.7-percentage-point Canadian drag drops out of the YoY comparison and Canadian headline CPI will mechanically jump unless other forces offset.

The stakes

CPI inflation determines real wages, real interest rates, and the actual purchasing power of every Canadian and American household. The two countries spent 2022–2025 running surprisingly similar inflation paths despite very different fiscal and monetary inputs, the small remaining gap is mostly methodological (MICI, OER lag, carbon tax), and the underlying core measures are still meaningfully above target in both countries.

The short version: Canada and the US are running very similar headline CPI now, the underlying core is stickier than the headline in both places, and most of what looks like a Canada–US gap is methodology rather than economics. The chart converges in 2025; the divergence is likely to reopen in 2026 as tariffs hit US goods inflation and the Canadian carbon-tax drag rolls off.