CPI Monthyly Percent Change

The graph and data (http://data.bls.gov/PDQ/servlet/SurveyOutputServlet)show a large change in the Consumer Price Index in the United States. Consumer confidence about the future increased savings. Job loss and low GDP growth have contributed to a decline in the price level. What happens if deflationary expectations become entrenched?

I have mixed economic emotions about the data. I see wages declining with prices so I expect to see my wages decline. Already, I'm being asked to take a 1.5% price cut. I also see massive amounts of cash flooding the economy so one should observe an increase in the price level. Fiscal policy is always too slow to help the short-run so inflation will be looming two years from now. In the great depression, the growth in the money supply was not great enough when worried consumers began hoarding their money. In the depression, the M1 money supply actually increased but banks failed leaving consumers holding money in coffee cans and in lock boxes buried in the back yard. The money multiplier was less so investment fell causing further decay of income, production, and growth.

Banks are failing now, people are saving, massive layoffs continue, labor are asked to make wage concessions, and pundits are saying that the fiscal stimulus is not enough. If deflationary expectations get built into bargaining units and spending habits, could a depression be too far away?