Just four months ago, soaring commodity costs were the biggest economic worry as oil raced to a record high. Now the buzz word is deflation, and that is altering both the economic outlook and the way governments need to respond to the threat of a deep recession.
"It is time to worry about inflation, or more precisely, the lack of inflation," a Merrill Lynch economist, David Rosenberg, wrote in a recent note to clients.
Referring to the chairman of the Federal Reserve, Ben Bernanke, he wrote, "The combination of falling commodity prices, rising unemployment and our expectation for several quarters of negative real growth suggests that Bernanke will, perhaps within the next year, come face-to-face with his greatest fear: deflation."
Falling prices are damaging to the economy because they encourage consumers to delay purchases and companies to cut costs - exactly the opposite of what is needed to revive growth and get credit markets functioning normally again.
For now, the risk of prolonged deflation looks remote, in large part because the United States, Europe and others are injecting trillions of dollars to reflate their economies, with more money likely to come soon.
Olivier Blanchard, chief economist at the International Monetary Fund, said headline inflation measures would probably briefly dip into negative territory in the "near future."
"What matters, if we are going to worry about it, is if we have sustained deflation," he said last week. "At this stage, this is something that we should worry about. But we think that the probability of such a sustained deflation is, for the moment, very small."
Economic data due this week are expected to show that German wholesale prices dropped 1 percent in October from September, while euro zone inflation rose a modest 0.1 percent, according to Reuters polls.
The European Central Bank, Bank of England and Swiss National Bank all cut short-term interest rates last week, and more reductions are expected before the year is through.
But lower rates do not do much for the broader economy when banks are reluctant to lend and consumers and companies have little interest in borrowing. The U.S. and British economies contracted in the third quarter, and figures due Friday are expected to show a decline in the euro zone as well.
The IMF said last week that more fiscal measures were needed as the developed world faced its first yearlong contraction since World War I.
Rosenberg and other economists have been rereading a speech Bernanke gave in 2002 on how to tackle deflation. His suggestions included expanding the Fed's purchase of assets and offering low-interest loans to banks, two things the central bank has already done.
Bernanke and his colleagues have been so aggressive in expanding lending and asset purchases that the Fed balance sheet has more than doubled over the past two months to more than $2 trillion. That does not include the authority of the U.S. Treasury Department to invest hundreds of billions of dollars in banks and buy assets.
European countries have pledged €2.2 trillion to help stabilize financial markets.
Much of the focus so far has been on getting money into banks in the hope that they will turn around and lend it. Attention now is starting to shift toward putting money in consumers' pockets and into infrastructure projects that would generate jobs.
"Without further stimulus, this will be a bleak fourth quarter with a bleak first quarter to follow," said Bill Cheney, chief economist at John Hancock in Boston.
The U.S. Congress is expected to take up another spending package before Barack Obama takes office as president in January, a proposal that could exceed $300 billion.
It is expected to include money for projects like roads and bridges, as well as provisions to ease the burden on homeowners struggling to pay mortgages.
"A massive government stimulus package on the order of $300 billion to $500 billion will be needed to jolt the economy out of its coma," said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, New Jersey.
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