Does this graph show deflation?

No and yes.

That Google-trends graph shows an inflationary use of the word deflation in search terms and news references.

My personal theory about what the Fed and the Treasury are trying to engineer is this:

• Push the claim that the U.S. is on the border of or in deflation
• Use that claim to propose serious inflationary measures
• Inflate the U.S. out of its debt

Alan Greenspan used a similar deflation-scare scheme to reignite the debt-driven economy in the last half of 2002 to justify a lower Fed rate at 1% and to keep it there for much too long time. The media helped a lot in that by generating "deflation" talk. Greenspan’s policy ignited the housing bubble and led to serious commodity inflation.

While the housing bubble grew and commodity prices exploded, the government and the attached media did their best to obfuscate that the money supply expanded too fast and created serious price-inflation. That was often observable in the reporting when the Bureau of Labor Statistics released the monthly consumer price index (CPI).

When the CPI went up, the media emphasized "core-inflation", the consumer price increase which neglects "volatile" oil and food prices. Now as the relative high inflation decreases a bit, and just like back in late 2002, the media emphasis is on the "headline inflation" number.

CNN Money in July 2007: Inflation tame in June

Government’s key measure in line with expectations, despite higher food prices.

NEW YORK (CNNMoney.com) — Prices paid by consumers rose in June, but when food and energy prices were stripped out the government’s key inflation measure was in line with Wall Street expectations.

CNN Money yesterday: Consumer prices in record decline

Inflation falls by a record 1% in October, worrying economists that falling prices will become a disturbing trend.

NEW YORK (CNNMoney.com) — Consumer prices fell by a record amount in October, another worrisome sign about the contracting economy, the government reported Wednesday.

Only the 16th paragraph of the current piece mentions core inflation, which was – 0.1% compared to last month prices, but the word "deflation" occurs nine times.

In July 2007 the year- over-year consumer price increase, which was downplayed as ‘tame’ by CNN, was 2.7%. The October 2008 y-o-y price increase, that now is used as a deflation scare, was 3.7%, coming down from a high of 5.6% just four month ago. In other words, inflation is still too high. There is no price-deflation (yet).

While inflation was on its way up, CNN played it down. As it is now
decreasing a bit, but still high, CNN talks of deflation. (I use CNN
simply as an example here. All mainstream media do just the same.)

Edward Harrison at RGE Monitor provides graphs of the y-o-y CPI and concludes:

From
where I sit, this information reinforces the idea that falling oil
prices are going to bring down inflation for some time to come as
comparisons to year ago levels will continue to be favorable. However,
there has not been a similar move in underlying core inflation as yet.
Consumer price deflation is a completely oil-relate phenomenon to date.

Again what I see going on here is an engineered campaign to talk of deflation where inflation is only decreasing from too high levels.

The Fed, in my theory, will then uses this deflation-scare to lower the Fed rate to zero and to adopt "unusual" measures like quantitative easing which is the method the Bank of Japan used to prop up the bankrupt Japanese banking system.

Indeed the chief economist of the Bank of America is already urging for such measures:

The
Federal Reserve should buy mortgage securities in the open market to
loosen up the mortgage market, said Mickey Levy, the chief economist at
Bank of America on Wednesday. The move would be a form of so-called
"quantitative easing" undertaken by the Bank of Japan in the early
2000s to fight deflation. Under this approach, the Fed would ignore its
normal policy of targeting short-term interest rates. The idea appears
to be on the Fed’s radar screen. Earlier Wednesday, Fed vice chairman
Donald Kohn said quantitative easing measures were under review at the
central bank as normal contingency planning.

Japan used such measures because it saw a bit of real deflation. It really had a falling
consumer price index. The deflation was good for consumers. Prices fell
stronger than wages, giving the people more money in real terms.

But the U.S. has yet to see any deflation. Using the Japanese policies
while there is still serious inflation in the U.S. economic system will
lead to higher inflation, possibly much higher inflation.

For all the above I’ll stick to my theory for now.

But there are other theories on what that powers-that-be are engineering here. Dude, where’s the Dharma? (via BP) muses about The TARP Fund? and Empire.

His theory:

• The p-t-b want to save the U.S. empire status at all cost
• The US-dollar as the vehicle of empire is therefore not allowed to fall as it should
• Inflation would help out of the current crisis but tank the dollar
• The p-t-b prop up the U.S. dollar via the TARP and Fed lending
• Thereby the p-t-b are engineering a deflation which will lead to a depression but save the empire.

Dude expands on that here.

It is an interesting (possible?) theory, but too far fetched for me.
But it would explain the secrecy around the use of the TARP money and
the trillions of mysterious Fed lending.

Anyway, how do you interpret what is happening now?