The recent 1.9% record drop in wholesale prices has fueled economist fears that the U.S. is headed for a dangerous period of deflation. The last serious case of deflation occurred during the Great Depression; it is a dangerous cycle of widespread falling prices, declining incomes, and a large drop in consumer spending. The results are disastrous to the economy and the Fed' main economic tool, reducing interest rates, has little effect on it. Japan has already been caught in a long-term deflationary spiral, despite interest rates at zero.
See "Price dive sparks deflation fears", Jeannine Aversa, Chicago Sun Times, May 15, 2003