James Bullard, President of the Federal Reserve Bank of St. Louis, is still concerned about deflation and sees a very real threat of prices dropping.  In a just-released paper, Bullard explores the dangers of deflation.  In Seven Faces of "The Peril", Bullard compares current US monetary policy to the policy followed by Japan since 2002.  And he sees a lot of similarities.  He notes the similarities between the two policies revealed by this chart, and how it appears to show US policy developing a "low nominal interest rate outcome":

Bullard writes: 

To maintain international comparability to the extent possible, all data are taken from the OECD main economic indicators. The short-term nominal interest rate is taken to be the policy rate in both countries. the overnight call rate in Japan and the federal funds rate in the U.S. In.ation is measured as the core consumer price index inflation rate measured from one year earlier in both countries. The data in the Figure never mix during this time period: The U.S. data always lie to the northeast, and the Japanese data always lie to the southwest. This will be an essential mystery of the story.

Benhabib, et al., wrote about the two lines in the Figure. The dashed line represents the famous Fisher relation for safe assets, the proposition that a nominal interest rate has a real component plus an expected inflation component. I have taken the real component (also the rate of time preference in the original Benhabib et al. analysis) to be .xed and equal to 50 basis points in the Figure. Practically speaking, any macroeconomic model of monetary phenomena is going to have a Fisher relation as a part of the analysis, and so this line is hardly controversial. The solid line in the Figure represents a Taylor-type policy rule: It describes how the short-term nominal interest rate is adjusted by policymakers in response to current inflation. In the right half of the Figure, when inflation is above target, the policy rate is increased, but more than one-for-one with the deviation of inflation from target. And when inflation is below target, the policy rate is lowered, again more than one-for-one. When the line describing the Taylor-type policy rule crosses the Fisher relation, we say there is a steady state at which the policymaker no longer wishes to raise or lower the policy rate, and, simultaneously, the private sector expects the current rate of inflation to prevail in the future. It is an equilibrium in the sense that, if there are no further shocks to the economy, nothing will change with respect to inflation or the nominal interest rate. In the Figure as it is drawn, this occurs at an inflation rate of 2.3 percent and a nominal interest rate of 2.8 percent. This is sometimes called the targeted steady state.

Read the full paper here.

And listen to Bullard speaking with NPR's Michele Norris about deflation on yesterday's All Things Considered: