Inflation in Canada and the US since 1774

It is often said that Canada and the United States are very much alike, except for the fact that Canada has tons of French people (myself included) and free (TANSTAFL) healthcare. It is also often said that when the US economy catches a cold, Canada gets pneumonia.

From an economic historian’s perspective, this is a hard claim to swallow without making tons of nuances. Yes, economic conditions in Canada are heavily affected by those in the US. But, the evidence for that generally concerns the twentieth century. There is very little before that. The first pieces of evidence we have for Canada start only in the 1870s. In fact, that evidence is also subject to many caveats (my work with Michael Hinton suggests that the GDP deflator for Canada from 1870 to 1900 causes a considerable underestimation of Canadian economic growth during the period and that Canada).

Thus, we do not know if that was always true. To some extent, I am tempted to believe that this is true, but that it is has grown “truer” over time. Canada used to be geared towards Britain and Europe for a long time, but, progressively, it became more connected with the United States. Now, the Maddison project data shows that Canada in terms of GDP per capita converged towards that of the United States from the 1870s to the present day. Morris Altman produced revised estimates of Canadian GDP growth (here) that show a moderately steeper convergence between 1870 and 1929. Given the amount of capital movements between both countries, this is not really surprising (in fact, excluding Quebec from Canada brings the two countries closer together).  But again, we don’t go back further than 1870.

So, to see if this is the case, I decided to take my paper (online since yesterday) on creating a price index for Canada since 1688. Measuring Worth offers an American Price Index that starts in 1774. If the two economies began to become more interlinked, then a price index that goes back to the founding of the United States should do the trick. The result is below.

pricescorrelation

I organized the data by time period and it seems that the rates are generally correlated (which you would expect since global monetary conditions do suggest some long-terms similarities in terms of price trends – I have many reservations about the book I am citing here, but it gets the empirical point across). However, the dispersion seems to collapse over time. As we move from the colonial era to the modern era, inflation rates get more tightly grouped together. Free trade, lower transport costs, central bank policy, capital mobility and labor mobility would have factored in to mean that things become more tightly knit.

It does seem like Canada and the US became more interdependent over time.

I have more to come on this!

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2 thoughts on “Inflation in Canada and the US since 1774

  1. The US auto industry builds a lot of its cars in Canada and then ships them back to the US. One reason is that US health care costs (which have to be covered by the manufacturers under the union contract) are considerably higher than those of Canada. The difference amounts to hundreds of dollar per car. Since the cars are sold here in the US, it is more profitable to build the cars in Canada than in the US. And when the manufacturers are selling millions of cars each year, even a few hundred dollars per car saved by building them in Canada makes a lot of sense. The same thing applies to cars built in Mexico than the USA.

    From the viewpoint of the manufacturers, even a relatively small difference in total labor costs does add up. More profits, more dividends, stockholders, bond holders, all have an “interest” in building cars where it can done cheaper than it is in the US.

    Also a lot of the part that go into an “American” automobile aren’t “Made in the USA”. Again, lower total costs. Even if your “American” car is assembled here, the parts that make up the car are in many cases manufactured outside the US. This is also why if Trump starts putting tariffs on imports, it will increase the cost of almost everything you buy today. Nor is it likely to increase jobs that much as manufacturers facing higher labor costs will do everything in their power to automate production in order to remain “competitive”.

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