The US Fed has dramatically changed its language: it now says inflation is too low.

QEII (the second burst of “quantitative easing”) is steaming up the Potomac and will dock at the Eccles Building (Fed HQ) in November.

The question is, will it work? Or will it simply display the Fed’s impotence in the face of an economy with too much capacity, too little spending and no desire to borrow. Despite colossal amounts of liquidity already, lending continues to contract because the price or supply of credit is not the issue: the great deleveraging of the US economy has only just begun.

No wonder the Federal Open Market Committee’s hand wringing has become more urgent, more fretful.

Even back in June 2003 when the economy was clearly flirting with deflation and the Fed funds rate was cut to 1%, the statement accompanying that move said only that the probability of an “unwelcome fall in inflation” exceeds that of a rise.

After last month’s meeting that left the Fed funds rate at 0-0.25%, the statement said inflation “is likely to be subdued for some time”.

By switching the language last night to a statement that inflation is now “at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability”, the Fed is signalling for the first time that it’s worried about deflation.

Markets didn’t know what to make of this, and went sideways. Obviously the clear message that the Fed stands willing to “provide additional accommodation” was welcome, but the apparent warning about deflation was unnerving.

Prices are not falling across the board in America yet, but it’s very close. The Cleveland Federal Reserve produces a median CPI as an alternative to the main CPI published each month by the Bureau of Labor Statistics. Instead of weighting and averaging all prices, the researchers at the Cleveland Fed say this provides a better picture of the inflation trend than either the all-items CPI or the core CPI, excluding food and energy.

In August the median CPI was 0.1% higher than July. The month-on-month number has been 0.1% or below for 12 months; in April, amusingly, it was minus zero, before recovering to plus zero in May.

The year-on-year trend for this measure of inflation in the United States is 0.5%.

Pricing power in the US is simply melting away. According to a recent analysis of the August CPI by Dave Rosenberg, of Gluskin Sheff, most industries are losing pricing power and only a few are gaining it: autos, tyres, hotels, jewellery, computers and utilities. Everyone else is finding that their pricing power is vanishing.

That’s because US consumers are on strike. They’re sick of burdening themselves with debt to support the world’s manufacturers and service providers with stuff they don’t need.

The bond market is signalling that this is not a short-term change of attitude, by accepting 2.58% interest on 10-year Treasury bonds. In fact that yield could fall even further since bond pricing at the moment includes an inflation expectation number of 1.8%, which looks high against the median CPI.

Can the US fall into outright deflation whatever Ben Bernanke does? As Barack Obama might say, yes it can.

*This article originally appeared on Business Spectator.