By Jeff Brown
When the Federal Open Market Committee ended its regular meeting Wednesday, it called inflation worrisome, not because it’s too high but because it’s too low. There was more troubling inflation news on Friday, with forecasts that Japan is in for a stint of deflation, when prices fall.

Recently the government said that U.S. prices had fallen by 0.4 percent between March 2008 and March 2009. A year earlier, it had reported a year-over-year increase of nearly 4 percent, a tad above the long-term average around 3 percent.

What’s the problem? Aren’t falling prices good?

Not always. Across-the-board price declines can devastate borrowers and businesses.

For ordinary consumers, predicting inflation rates is key to determining how much money to put into safe holdings like bank savings, versus riskier bets like stocks, bonds and real estate.

If you’re living on a fixed income such as a traditional pension, you probably welcome falling prices. After all, most people were happy when gas prices fell from $4 a gallon to $2. Consumers applaud when computers, flat-screen TVs and other electronics get cheaper.

But the housing market shows the ugly side of deflation. Prices in many parts of the country have fallen by well over 20 percent in the past couple of years, leaving millions of homeowners owing more on their mortgages than their homes are worth.

Homebuyers generally expect the opposite: rising prices enabling them to sell their properties for more than they owe, so they can move if necessary. Most people also assume inflation will push their incomes up, making payments on mortgages and other debts easier to handle.

Anyone thinking of buying a home today should carefully consider the risk that home-price deflation will continue. It might be too risky to buy if you think you’ll need to move in four or five years, but a good deal safer if you expect to stay put for 10 years or longer, giving the market time to recover.

Businesses dread deflation because it makes consumers postpone purchases in hopes of lower prices. Businesses themselves are reluctant to invest in new equipment or other purchases if they think lower prices are coming, or if they worry their revenues will fall as they get less for their products and services. That undermines economic growth, which is what concerns the Federal Reserve.

Investors use inflation forecasts to estimate “real” returns on investments. If you make 7 percent a year and inflation runs at the long-term average around 3 percent, your real return is 4 percent, reflecting the growth in your buying power after inflation chews into the value of every dollar.

With the stock and bond markets in turmoil, safe investments like certificates of deposit and money markets are appealing, because they promise little or no risk of loss. Because inflation is all but non-existent, you need not worry as much about its effect on low yielding investments like CDs.  The 12-month CD yields around 1.39 percent, according to the BankingMyWay.com survey.

Use the CD shopping tool to find the best deals. Discover Bank (Stock Quote: DFS) offers a 12 month CD yielding 2.33 percent, almost a full point above the average, while Corus Bank (Stock Quote: CORS) in Chicago pays 2.73 percent.

Of course, if inflation returns to a normal 3 percent level, money put into CDs will lose ground. That’s why long-term investors emphasize stocks, which, despite lots of ups and downs, generally provide returns of 8 or 10 percent, outpacing inflation.

But inflation is still damaging. The Savings Goals calculator, shows that a 35-year-old could amass $1 million by age 68 by starting with $10,000 and investing $500 a month at an 8 percent return. But with inflation averaging 3.1 percent, the $1 million would buy what only $370,000 buys today.

Several BankingMyWay.com calculators show how inflation chews at investment gains. Try playing with the numbers in the Savings Taxes & Inflation calculator, the College Savings calculator and the Retirement Income calculator.

— For more ways to save, spend, invest and borrow, visit MainStreet.com.