It would appear from the April CPI release that the Bank of Canada won't be obliged to figure out how to implement policy quantitative easing after all.

Of course, that's not a conclusion to which you'd leap from the headline CPI numbers:

If all you looked at was CPI inflation, then deflation looks like a serious risk: the y/y rate is falling, and the inflation rates over shorter horizons are all negative.

But that's not all that the Bank of Canada looks at. The headline CPI numbers are pretty volatile, and are highly susceptible to the sharp swings we see in gasoline and food prices. For policy purposes, the Bank pays closer attention to core CPI, which strips out movements in the more volatile sectors. And when you do that, this is what you get:

Note the difference in scale of the vertical axis. Apart from a scary reduction of 4% at annual rates in January, the core index has increased or held steady; in the six months since the October peak, core inflation has held to the Bank's 2% target.

Looking out into the near and medium term, there's reason to be sanguine, mainly because financial markets are starting to function again. Between November 2007 and September 2008 – while Canada was still in expansion and the Bank's measure of the output gap was still positive – the overnight target was reduced from 4.50% to 3% as a measure to counter liquidity problems. And much of the subsequent reduction was also aimed at calming financial markets.

But now that the various credit spreads are shrinking back to their normal levels, those interest rate cuts can now be interpreted as a conventional monetary stimulus. So it may not be necessary to resort to unconventional methods after all.