WASHINGTON (MarketWatch) -- In America today, prices are just as likely to be falling as rising. For the first time since the 1950s, consumer prices are actually lower than they were a year earlier.

The Labor Department reported Friday that the consumer price index was unchanged in July. In the past year, the CPI has fallen 2.1%, the largest drop since 1950. See full story.

It's mostly energy prices that have fallen over the past year, but it's not entirely a story about oil. Non-energy prices have risen just 1.8% in the past year, one of the slowest gains since the 1960s.

The last time non-energy prices rose so slowly, the Federal Reserve was sounding alarm bells about deflation. That's one big reason that the Fed kept interest rates so low in 2003 and 2004.

Is the Fed going down the same perilous path again? Will the Fed keep rates low for too long? That's the worry of people who fear that inflation may still emerge as the greatest danger to the nation's long-term economic health.

There's one big difference between then and now, however. Asset deflation.

In 2002 and 2003, home prices were rising almost 11%. The Fed's low interest rates were fueling the housing bubble. Today, home prices are falling at a 10% annual rate. The Fed's low interest rates aren't fueling much of anything.

There are other big differences too, that might suggest inflation won't be a worry for a while. Unemployment is at 9.4%, about 4 or 5 percentage points above its natural level. With unemployment so high, workers have no ability to demand higher wages.

Only about two-thirds of the nation's manufacturing capacity is operating. Utilization in other industries, such as construction and retail, is also very low. With so much slack capacity and so much competition, no firm can raise prices.

Inflation rates won't stay flat forever, but it doesn't look like they'll be soaring out of control any time soon.

-- Rex Nutting, Washington bureau chief