deflationary spiral

When the economic gurus at the Fed move the levers of U.S. monetary policy, they do so with two often-conflicting goals in mind: promoting maximum employment and keeping prices stable. Many critics are now arguing that that Fed should focus solely on prices.

The Federal Reserve bought $7.3 billion worth of U.S. Treasuries Friday as it started a second round of quantitative easing meant to stimulate the nation's economy, media reports indicate. The QE2 plan, designed to boost job creation and prevent deflation, has been highly criticized.

As the G-20 meets in South Korea, many world leaders have stepped up their complaints about the Fed's $600 billion quantitative easing program, as well as the rapid flow of capital into emerging markets. Some countries are installing capital controls in response, but those won't be enough, says global finance expert Peter Cohan.

Even as consumers celebrate lower prices, economists fear that widespread price decreases signal more problems ahead for the U.S. economy. To show the breadth of price declines, we've compiled a list of popular products that have dropped in price over the last year.

Lower prices may sound nice, but deflation can wreck an economy with pay cuts, lower profits and falling stock prices.

The recent stream of modestly positive economic news means the Fed probably won't take any further action to stimulate the economy at its upcoming meeting. But nobody is calling the economy healthy yet.

Major structural and cultural differences between the U.S. and Japan mean that Treasury bond investors simply using Japan as a template for how things will unfold here may be overlooking important factors. Key among them is a growing realization that Japan may have collectively opted for deflation.

Mired in deflation and stagnant for decades, Japan has been the economic basket case of the developed world. But the world's third-largest economy is getting an unexpected lift from roaring growth in emerging markets.

The Consumer Price Index fell 0.1% in June, but the core rate rose a higher-than-expected 0.2%, which suggests that the slowing U.S. economic recovery has lowered inflation. But it hasn't triggered deflation -- at least not yet.