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I am convinced that we are seeing a bifurcated situation. Consumables are inflating and hard assets and real estate are deflating. I think this is due to two things.

People have to eat and they are not going to resteraunts, as they either can’t due to their situation (unemployment, reduced ot, etc) or they are fearing the worst and cutting their spending where it will do as much good as possible. This creates additional demand for basic goods causing a corresponding increase in price.

A corrolary can be made for the banks and business who are sitting on wads of cash to either deal with their fiscal situation (housing collapse, drop in demand, etc) or fortifying against the worst (upcoming tax increase, continued economic malaise, sovereign defaults, etc). However, THIS reduces demand for the goods they would normally buy and this is resulting in a decrease in price (houses, capital equipment, vehicles, etc).

Now most of the pricing decrease was avoided by reducing capacity through OT reduction, layoffs, older factory closures, inventory reduction. However, as the demand continues to remain flat, they are going after market share in order to generate some form of growth. The best way to pursue that is through a price reduction. And don’t forget that companies are continuing to go after productivity to reduce cost as well, providing additional opportunity for cost reductions.

Thus we end up with base goods rising in price as “more” money chases an equal amount of goods, and capital and real estate falling in price as “less” money chases an equal (real estate) or even in some cases fewer (idled factories) of goods. Resulting in a bifurcated market based on supply/demand.

The argument for inflation across the board is a valid argument - provided those with the cash were actually using it to obtain some good or service. But they aren’t they are hoarding wads of cash in the banks and company reserves in order to either wait out the situation or resolve balance sheet issues over time.

Deflation is viable across the board, except when you consider base goods and the emperical data (one reason many of those items aren’t in the inflation models). The stuff that cities need to survive will still be required to survive and as long as the demand is there the prices will follow.

Personally, I am leaning toward macroeconomic deflation at this point because no one wants to be the first in the game to put their neck out. There is no incentive for anyone to take the risk. If the govt issue a ton more $ what are they going to spend it on - more roads? That won’t inflate anything. The banks still won’t have incentive to loan as they still need to cleanup their books (something no one will force) and there is another round of foreclosures coming to drive them to keep the funds. Companies have no incentive is they are going to be hit with addl regulation and taxes. So where would the increase demand come from?

Do they want to inflate - oh yeah - are they pretty much stuck in a corner - I think so. I still see things inflating on a microeconomic/base goods standpoint at the grocer...because that demand isn’t going anywhere. At the macro level I just don’t see demand coming from anywhere.