Manufacturing costs around the world, and hence the price of goods, are way down. Manufacturing wages are generally down too. Both will only get worse as more developing economies join the global marketplace.
Housing costs form one of the largest expenses in the average American household's budget, and those are falling precipitously. All signs indicate that they'll continue to fall.
I think the Fed is just now starting to get firm data on just how much liquidity got sucked out of the market when the bubble burst. I don't think they like what they're seeing.
The defensiveness of the lending industry is only going to compound all of these problem.
Right now, it looks as though high oil and metals prices are all that's propping prices up. Yet those commodity prices have as much to do with speculation in the futures markets as they do any real increase in cost. I'm hearing more and more average people, people who don't really understand or follow the markets, talk about commodity futures as if they easy risk-free investments with guaranteed high returns. That sort of sentiment among the general population is one of the first indications that a bubble is forming. Given the highly leveraged nature of most of those investments, a panic sell situation is creepily plausible. That could severely exacerbate disinflationary problems.
Back in the late '80s Japan experienced the synergistic effects of cheap foreign goods, lower manufacturing wages, a real estate bust, and a lending industry that was scared to lend. (Sound familiar?) Deflation set in and wrecked their economy. Their central bank couldn't fix it, not even by cutting rates to 0%. Their economy still hasn't fully recovered.
Still think there's no reason to fear deflation?
Inflation isn't ideal, but at least it's tolerable, at least it can be managed somewhat by the Fed. Deflation is disastrous. It wrecks an economy and can't easily be reversed. We're far better off taking the risk of inflation rising a point or two in the short term if it ensures we won't fall into a depression.
Bernanke and the FOMC did the right thing.