If prices go up, it's inflation, and we usually don't like very much of it. Most of us think price stability is good thing. So a CPI that goes up only 1% a year OR down 1% a year would be a good thing. Even after RR broke the back of inflation (the 10%/year kind) we've had about 3%, and we'd like it to be lower. So, where is the gloom and doom if we have 0, or even -2%?
For a government that has accumulated trillions in debt, inflation is the only way to pay back the bills. An extended period of zero inflation, or worse, deflation, will wreck the the economy.
Deflation
Since 1930 it has been the norm in most developed countries for AVERAGE PRICES to rise year after year. However, before 1930 deflation (falling prices) was as likely as INFLATION. On the eve of the first world war, for example, prices in the UK, overall, were almost exactly the same as they had been at the time of the great fire of London in 1666.
Deflation is a persistent fall in the general price level of goods and SERVICES. It is not to be confused with a decline in prices in one economic sector or with a fall in the INFLATION rate (which is known as DISINFLATION).
Sometimes deflation can be harmless, perhaps even a good thing, if lower prices lift real INCOME and hence spending power. In the last 30 years of the 19th century, for example, consumer prices fell by almost half in the United States, as the expansion of railways and advances in industrial technology brought cheaper ways to make everything. Yet annual real GDP GROWTH over the period averaged more than 4%.
Deflation is dangerous, however, more so even than inflation, when it reflects a sharp slump in DEMAND, excess CAPACITY and a shrinking MONEY SUPPLY, as in the Great DEPRESSION of the early 1930s. In the four years to 1933, American consumer prices fell by 25% and real GDP by 30%. Runaway deflation of this sort can be much more damaging than runaway inflation, because it creates a vicious spiral that is hard to escape. The expectation that prices will be lower tomorrow may encourage consumers to delay purchases, depressing demand and forcing FIRMS to cut prices by even more. Falling prices also inflate the real burden of DEBT (that is, increase real INTEREST rates) causing BANKRUPTCY and BANK failure. This makes deflation particularly dangerous for economies that have large amounts of corporate debt. Most serious of all, deflation can make MONETARY POLICY ineffective: nominal interest rates cannot be negative, so real rates can get stuck too high.
http://www.economist.com/research/Economics/alphabetic.cfm?letter=D&CFID=29650468&CFTOKEN=64120487
This answers better than I could why I’m so worried and believe the drop in food and clothing prices are worth watching. Its not bad yet, but I firmly believe it will be.