John At The Center

In hindsight while there was clearly a strong disinflation trend back then, outright deflation didn’t appear to be as big a risk as the Fed thought. Annual growth in consumer prices never fell below 1% and was rarely below 2% after 2002.

The problem back then, Reinhart said, was “we didn’t know why inflation was going down as much as it was.”

The tipping point is whether relative-price deflation becomes an expectation of future, economy-wide deflation.

In other words, just like the case of inflation, expectations hold the key to deflation.

http://blogs.wsj.com/economics/2008/11/20/deflation-disaster-or-just-a-nice-discount/