In the short term - for the duration of this recession, which will be at least another year - four very deflationary forces are at play. 

First is the ongoing weakness in commodity prices, which takes time to work its way through the system.  Crude oil prices are translated quickly to pump prices, but price increases in petrochemicals - which are used, for example, to create plastic parts that go into consumer electronics - take time before their impact is apparent in finished goods.  We are getting hit by the collapse of commodity prices, not just from crude oil, although that is the most conspicuous.

Second are excess inventories, which are the mortal enemy of price increases.  Manufacturers and retailers must cut prices to get rid of inventories. Right now, merchandisers are cutting prices on spring goods before they are out of their boxes and on the racks.  They over-ordered and didn’t anticipate demand would fall off a cliff.

The most interesting phenomenon, which we are now seeing for the first time since the 1930s, is wage cuts and shorter hours.  In the post-World War II period, the only way employers could cut costs was to lay people off.  Under high inflation, employers used another method of controlling labor costs, which was to freeze pay or raise pay less than the rate of inflation.  Now, however, there is no inflation and we are back to the 1930s, when deflation reigned.  To lower costs, you must get rid of people or cut hours. About 6% of employers have cut wages or hours in the last year, and another 10% plan to do so.  This is less than the number of employers that have had layoffs, which in the 20% area, but it is growing and it is highly deflationary.

The fourth and final deflationary force is excess capacity in the economy.  The Commerce Department has an interesting measure, which shows the excess capacity versus demand across the economy.  An interesting and powerful relationship is apparent, which shows that excess capacity reduces the CPI with a six-month lag.