Deflation is back and the U.S. Federal Reserve would be wise to pay it special attention or risk following in the Bank of Japan’s footsteps, says CIBC World Markets in its monthly indicators report.

“While the Fed is refusing to publicly recognize it and most economists are still skeptical of its existence, “Big D” is back, and this time deflation is no longer solely in the domain of asset prices,” said Jeff Rubin, chief economist and managing director of CIBC World Markets. “For the first time in nearly 50 years, private sector prices are falling in the U.S. economy.”

While there is still a faint heartbeat of inflation in more closely watched price barometers — the GDP deflator, which is the broadest measure of prices in the economy, is still running slightly above zero and consumer price inflation is running at 2% – after stripping out government and housing, U.S. business prices are already heading lower.

Rubin said some of the warning signals evident today are the same that the Bank of Japan faced in 1995. At the time, the Bank of Japan was confident that extraordinary easings of rates would quickly rekindle demand, much the same as today’s markets seem supremely confident in the resuscitating power of a 1.25% federal funds rate.

“The Bank of Japan waited far too long to aggressively respond to deflation and didn’t bring down interest rates to zero until consumer price inflation had already become negative,” said Rubin. “By that time it was already too late and Japan has been struggling with a liquidity trap ever since.” The GDP deflator in Japan has been negative in six of the past seven years and consumer price inflation has been negative for the last four years.

“The lesson for the Fed from Japan is to ignore the reassuring consensus of economists and act pre-emptively,” said Rubin. “For monetary stimulus to work, interest rates must get to zero before inflation does.”