Up until recently, the Bank of Canada and the Fed have pretty much followed similar paths. This is less a case of the Bank slavishly following the Fed’s lead than the fact that they’ve been generally facing similar policy challenges.

But this cycle seems to be quite different.

Here’s what the two central banks have been up to lately:

In mid-2004, both the Bank and the Fed had extremely expansionary interest rates, and they’ve been steadily removing that stimulus since then.

Here’s how core inflation – excluding energy and food – has evolved (the spike in Canadian inflation explains why the bank rate was higher than the federal funds rate during that period):

US core inflation crept up for much of 2004, presumably as a consequence of the expansionary monetary policy that preceded it. But Canada’s inflation rate seems to have hardly moved at all.

This gap can’t been explained by a weaker Canadian economy; GDP growth in the two countries has been quite similar, and the Canadian labour market doesn’t seem to have any problems creating jobs:

The explanation would appear to be on the supply side. Here is what’s been happening to fixed business investment:

It seems as though the best way to think of this is that Canada and the US are dealing with an oil-price-induced supply shock – but with opposite signs. Jim Hamilton at Econbrowser has already raised the possibility that the US may have to deal with 1970’s-style stagflation: increasing inflation combined with an economic slowdown. But now that the effect of oil prices on the Canada has changed since then, the Bank of Canada finds itself with strong economic growth with low and stable inflation.

For now, anyway.