In the biggest flim flam ever foisted on the American people, the Commerce Department reported that the CPI rose only 0.1% in May. Now this number is ridiculous because this "core" rate excludes food and energy. If you have been gassing up your car lately, you know that gas is now pushing $3.00 per gallon.

Nevertheless, the government says "not to worry about inflation." Well if you look more closely you'll find that gas prices actually rose 3.5% in May with crude oil prices trading near $72.00 per barrel.

In the midst of a worldwide recession Britain's CPI (consumer price index) rose 3.2% in February. This is not supposed to happen. In normal circumstances consumer prices usually drop or remain steady during a recession. The Office of National Statistics in Britain said that the increase in the CPI was due to an increase in food prices.

Now all of the pundits are scrambling for an explanation. Mervyn King, governor of the Bank of England, blames it on the depreciation in the British pound. Since the summer of 2007, the pound has fallen 28%. Mr. King tried to soothe investors by saying that he expects inflation to fall to the government's target of 2% later this year.

Today was a massive day, and not just for the stock market. The FOMC might as well just be turning on the printing presses for all the capital it is going to inject to banks with its $1 Trillion (plus) purchase of securities. The massive rally right after the FOMC announcement came well off of highs, but the excitement is there. The tame CPI is of no impact here in that sense.

Here are today's unofficial closing bell levels:

Dow 7,486.58 +90.88 (1.23%)
S&P 500 794.35 +16.23 (2.09%)
Nasdaq 1,491.22 +29.11 (1.99%)

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Readers of this space know that a preferred tactic, stemming from the graduate school years and schmoozing with economists and policy wonks is to 'take the other side in an argument' or 'argue the alternate point-of-view.'

Well, one argument forwarded by economic conservatives, market absolutists and others is that the proposed fiscal stimulus package will be 'inflationary' and that it 'won't stimulate the economy.'

Arguing to the contrary...

Economist Peter Dawson took up the above argument, but only because BloggingStocks required him to do so (Ah, the power of the press!).

"A stimulus package that's both inflationary and that won't stimulate the economy," Dawson said. "Hmm? The logic is a little curious here, because inflation implies that there's demand and economic growth, and a failure to stimulate the economy implies there's very little demand and hence very little or no economic growth. The conclusions contradict, so what do the economic conservatives say the stimulus is going create, demand or no demand? I'll leave it for them to clarify their argument."

Worried about inflation? Cross that concern off your list, at least for the immediate quarters ahead.

Inflation at the consumer level remains lame, after consumer prices fell 0.7% in December 2008, the U.S. Labor Department announced Friday, driven lower by an 8.3% plunge in energy prices and an 0.1% decline in food prices.

Even more important, for the year, consumer prices increased a minuscule 0.1% -- the consumer price index's smallest increase since 1954, when the CPI increased 0.7%.

Economists surveyed by Bloomberg News had expected consumer prices to decrease 0.9% in December 2008, and 0.2% for all of 2008.

Economist David H. Wang told BloggingStocks Friday that even though massive amounts of dollars are being added to the U.S. economy via monetary policy and various stimulus packages, investors have to remember an enormous amount of money has been destroyed as a result of the financial crisis and the U.S. recession.

The new year has arrived, and the inflation hawks -- in this case they're more like inflation police -- apparently have not made balanced analysis one of their New Year's resolutions.

The inflation hawks continue to harp about the danger of "rising inflation" in the U.S., due to the U.S. Federal Reserve's $2.3 trillion balance sheet and Congress's likely large, $700-850 billion fiscal stimulus package as the new Obama Administration takes office.

Where's the inflation?

Still, economist David H. Wang wants to know if the inflation hawks have been evaluating the same economic statistics he has been reviewing.

"Where is this inflation they are talking about?" Wang said. "Based on the 6-month and 12-month trend data, deflation, not inflation, remains the far greater danger. We are more likely to see deflationary conditions than an increase in inflation in 2009, with only a modest increase in inflation in 2010."

There's been no change in the U.S. economy's pulse, according to the most recent GDP data from the U.S. Commerce Department.

The U.S. economy contracted at a 0.5% annual rate in Q3, the Commerce Department announced, in its final reading on the quarter. The rate was unrevised from the previous estimate, but it was the weakest quarterly growth rate since Q1 2001.

Economists surveyed by Bloomberg News had expected the economy to contract at a 0.5% annualized rate in Q3.

One danger sign for the economy: consumer spending, which accounts for 60-65% of U.S. GDP, declined at a revised 3.8% annualized rate in Q3, worse than the 3.7% annualized decline estimate announced earlier.

Economist David H. Wang said the final Q3 GDP was a wash. "GDP came in as expected, but we can see the clear, continued drop in consumer spending, which is indicative of a prolonged recession," Wang said. "So it's stimulate with glee, to make the recession flee."

If you're concerned about inflation heating up in the months ahead, that's the wrong problem to focus on.

Despite a large and increasing federal budget deficit and $8.2 trillion in obligations (loan, loan guarantees, investments, monetary liquidity actions) aimed at ending the credit crunch, deflation -- not inflation -- remains the primary concern for the U.S. economy, at least though 2009.

Deflation is dreaded

The above may appear to be a misread, but it's not after reviewing the data, so says economist David H. Wang. Core U.S. inflation, which excludes food and energy prices, is running at a 2.2% annual rate; overall inflation at about a 3.5% annual rate, he said. Both are likely to trend lower as the recession continues in 2009.

"Housing and commodity prices have fallen by large amounts. Stocks prices are at low levels, from a valuation standpoint. Businesses have no pricing power, and there is no wage pressure. In this environment, prices are more likely to fall than rise," Wang said.

I sure am tired of writing about bad news. That's why I was happy to read this morning that the consumer price index (CPI) tumbled by a record 1% in October. In the last 61 years, there has never been a bigger monthly decline in the CPI. The cause? You guessed it -- a huge drop in gasoline prices.

But wait, there's more. Core inflation -- the Fed's favorite measure, which excludes "volatile food and energy" prices -- also declined for the first time in 25 years. The core consumer inflation decline was 0.1%. The numbers are not a big surprise after yesterday's wholesale inflation report.

The drop in prices across the board is great news for people with money. After all, it means they can spend less of that money to buy what they need. But the reason for the drop in prices is very ominous for the future of the economy. That's because companies have overproduced and they now have excess supply gathering dust on their shelves and showrooms.

Most investors / readers know about inflation -- an increase in the price of a good or service not connected to an improvement.

But fewer know about its flipside -- deflation -- a decline in prices.

Moreover, while inflation is a serious problem -- it erodes purchasing power and makes it hard for businesses to project and plan for costs, moving forward- - deflation is an even bigger menace.

That's because deflation decreases the amount of money flowing to businesses for their products/services, reducing the money needed to keep commercial activity alive and the economy growing.

Deflation: a danger sign

Don't misunderstand: a price cut after a company becomes more-efficient, or implements a 'holiday or promotional' sale, is fine. Deflation is different: it's pervasive price cutting and asset price declines -- falling prices across the product/service spectrum -- usually driven by a lack of consumer / wholesale demand.

Further, if deflation persists it can, you guessed it, lead to lay-offs. Companies and factories with lower revenue and demand for their products / services scale-back production to reduce expenses by laying-off employees. Those laid-off employees then cut expenses as they search for new work assignments by cutting spending, resulting in even lower demand for products, further price cuts, and lower company revenues, and a vicious cycle can ensue.

A basket of 16 basic food items costs $48.68, up 10.5% from a year ago, the American Farm Bureau Federation said in a press release that marketwatch.com covered on Friday.

Economist David H. Wang told BloggingStocks Friday many factors are driving grocery prices higher, including higher ingredient costs, higher energy prices, and rising demand for food in developing countries around the world (especially China, India, Russia, Brazil, and the Middle East).

A few grocery store tips:

Wang says that while there are many savvy shoppers in the states, many others are new to shopping. Wang, who worked in a grocery for three years while in college, offered his tips on how to lower your grocery bill:

• Stick to a shopping list and shun 'impulse' buys: Wang says this is perhaps the biggest money saver. "From the moment you walk in the store, grocery stores are designed to get you to buy more items than you plan to buy," Wang said. "You are bombarded with stimuli that tempts you to spend, and it works, so stick to your list. If it's not on the list, ask yourself if you need the item, or are buying merely on impulse."

• Coupon card: Most grocery chains offer a coupon card that automatically deducts for items on sale. Sign up for one and use it. But evaluate the coupons some cash registers dispense with a sales receipt. "Ask yourself if you need it or if it is on your list," Wang said.
  

• Evaluate buying in bulk. "Buying larger sizes usually lowers cost per food purchased but ask yourself if you will need and use the item," Wang said. "If the item is not your list, don't buy it, as you could be succumbing to an impulse buy, which will drive your food bill up."

So much for the slower global growth story dictating the price of oil.

Oil rocketed up more than $10 to $115 Monday after traders concluded that the U.S. Government's bailout to stabilize the financial system will both increase U.S. borrowing and inflation, and many also stimulate the U.S. economy.

"This market is wild, just wild," Energy Trader Jim Dietz told BloggingStocks Tuesday afternoon. "Everyone's throwing the slower global growth story out the window right now and seeing only more dollars out there from the [U.S.] Treasury." Dietz added he was currently long with oil and heating oil, with monthly contracts.

Oil rose $10.70 to $115.25 per barrel in heavy trading. Earlier today, oil trading in the electronic portion of trading, but not in the open outcry portion, was suspended for 5 minutes after it reached 10% move limit.

The other, major energy commodities also jumped Tuesday afternoon. Unleaded gasoline rose 10 cents to $2.69 per gallon, heating oil climbed about 17 cents to $3.06 per gallon, and natural gas gained 11 cents to $7.65 per million BTUs.

These days, the U.S. Federal Reserve is not getting a great deal of help from its companion major central banks regarding monetary policy stimulus to pull the global economy out of is pronounced slowdown.

In the case of the Bank of England, it kept interest rates the same despite anemic GDP growth. In the case of the European Central Bank, it kept it's key rate at a seven-year high.

Economist: Two terrible decisions

Today, the BOE kept its benchmark interest rate at 5%, the ECB did the same at 4.25%, and London-based economist Mark Chandler is happy with neither.

"Just two terrible decisions stemming from flawed reasoning. Just dreadful," Chandler said. "The BOE and ECB are putting too much responsibility on the Fed to stimulate demand when we need all three central bank engines pulling at once to get out of this economic rut."

There is an often-repeated joke in economists' circles that goes: Inflation is low, if you exclude food and energy prices. And of course, no one buys food or energy . . .

The above is a critique of the U.S. Federal Reserve's use of core inflation -- which excludes food and energy prices -- as a measure of lasting price changes in the U.S. economy.

Critics charge, "inflation is the sum of all products / services consumers use, not solely a portion." In essence, they argue that the Fed is underestimating inflation, creating a distorted picture of price conditions people face daily.

Still, a new research report by Michael Kiley, a Federal Reserve economist, supports the Fed's continued use of the core inflation metric. In Estimating the common trend rate of inflation for consumer prices and consumer prices excluding food and energy prices, Kiley's research reinforces the theory that total inflation historically contains more temporary changes in prices -- i.e. changes that could disappear -- than core inflation, thus supporting the continued use of core inflation.

In other words, core inflation is used by the Fed because it has been deemed a more-accurate predictor of long-term price changes or 'inflation over time' than total inflation, sometimes also referred to as 'headline inflation.'

Economist David H. Wang said he's by-and-large in agreement with Kiley's conclusions. "Core inflation is more indicative of long-term price changes. The problem occurs when you have periods of large price changes in food and energy, such as today, which pushes total inflation way up. Then the cry occurs that the Fed is not measuring inflation accurately," Wang said.

Just a short quarter ago -- three months -- the lingua franca in economics and financial circles was "decoupling" -- the argument that the global economy could grow, despite an economic slowdown in the United States.

Then the U.S. slowdown persisted, lower growth rates and projections in Europe Asia followed, and the commodity price correction ensued, led by the most vital of all commodities, crude oil.

Oil, which for the better part of four years knew only one direction -- up -- pulled back about $30, or more than 20%. (Oil closed Friday down $6.49 to $114.59 per barrel). And unlike previous mild dips, emerging market demand -- the "rest of the world" in the oil market -- was not enough to protect the oil bulls. U.S. oil demand did matter -- it had declined on a year-over-year basis for more than three months -- and is projected to drop 3.1% in 2008, according to U.S. Energy Information Administration data.

What's more, the EIA expects U.S. oil consumption to drop another 2.3% in 2009, to 20.08 million barrels per day.