Except for perhaps debtors, most everyone instinctively hates inflation. But deflation is actually much, much worse, because when prices are falling, people don’t borrow and they don’t spend. Why pay for something today when you can get it cheaper tomorrow?
The Fed’s preferred measure of inflation is personal consumption expenditures, excluding volatile food and energy prices (this is known as core PCE) — and that number happens to be dangerously close to deflationary territory.
The Fed is targeting inflation of around 2%, but the April reading on core PCE came in at just 1.05% — the lowest level on record. The Fed clearly expects inflation to pick up, but core PCE needs to get up off the mat if Bernanke hopes to taper anytime soon.