Consequently, the current low unemployment rate should not be viewed as a signal that the economy is overheating. The U.S. inflation rate continues to fall and, upon correcting for measurement bias, is between zero and one percent, something that again has not been seen since the early 1960s. In recent years, the Fed has increasingly shifted its attention towards generating a slow and steady disinflation with the goal of driving the inflation rate to zero or nearly so. The recent data suggests that the Fed has been very successful at doing this without generating a recession, as is commonly feared will result from a disinflationary monetary policy. But some economists now fear that the Fed has been too successful in its drive towards zero inflation and that we are about to enter a period of deflation.
Deflation is just as damaging to the economy as inflation.
One need only look at the last major episode of deflation in the U.S, the Great Depression, to find evidence. Figure 3 shows the annual percentage changes in the Consumer Price Index and the Producer Price Index. A major macroeconomic development over the last year or two has been the surprising decline in the size of the federal government budget deficit. Since then, due to a robust economy and a combination of fiscal restraint and tax increases, the deficit began to fall dramatically until it was eliminated at the beginning of 1998. The last annual budget surplus in the U.S. was in 1969.