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.

With the world's top central bankers gathering in Jackson Hole, Wyoming for their annual retreat, amid the global economy's worst credit crunch in a generation and slowing GDP growth in every region, BloggingStocks asked a few economists what, in their opinion, should be on the central bankers' minds.

Economist David H. Wang – "I bet they sneak away for a few minutes to watch the United States versus Argentina [2008 Olympics] semi-final basketball game today. I would. Seriously, on the one hand central bankers face the prospect of another round of housing-related write-offs and the need to intervene to keep markets liquid. On the other hand, we still have oil-fed inflation in the system, so my sense is they will issue a statement indicating that the major central banks 'stand at the ready to provide additional liquidity and take other measures' to keep markets functioning."

Economist Peter Dawson – "I would really like to see some European Central Bank comments from [President Jean-Claude] Trichet that he's ready to cut rates and that the greater risk in Europe, like the U.S., is toward recession. Demand in Europe is slowing, and if E.U.-U.S. trade flows continue to decline, that will prolong the recession. Hence, ECB monetary policy is intrinsic to the recovery story."

Economist Glen Langan – "Probably the most important item on their agenda, after maintaining liquid, functioning markets, concerns long-term interest rates. They haven't fallen, due to banks' reluctance to lend, in order to repair their balance sheets. Housing faces a 2-3 year recovery period but we'll need long-term mortgage rates for 30-year fixed loans to drift back toward 6.00% or 5.75% to speed housing's transition back to health. If monetary officials don't find a way to get long-term rates to trend lower, that delays the recovery."

There are a few developments that gladden the heart of nearly every business executive. Rising retail sales. Rising real incomes. Sustained job growth and household formation. And lower interest rates from the Fed.

U.S. business executives, investors, and typical citizens alike may have to wait awhile for a constructive dynamic to emerge regarding the first four, but there may be some good news regarding interest rates. We're headed back down to 1.5% - - or perhaps even lower - - regarding the Federal Funds rate, so says economist David H. Wang.

Further, Wang believes an interest easing is up ahead, even though that stance would seem to fly in the face of the Dow's recent rise/signs of life, and a July U.S. consumer price statistic of 0.8%, that indicated that inflation rose at its fastest pace in 17 years.

"The July inflation number was high, but the core inflation gain of 0.3% means the U.S. Federal Reserve has some breathing room on inflation, some leeway to cut interest rates, and they're going to need it," Wang said. Wang sees the Federal Funds rate, currently at 2%, falling to 1.5% by January 2009.

Bearish on U.S. stocks, economy through early 2009

As one might sense, Wang is not bullish on the U.S. stock market or U.S. economy over the next six to nine months. Here's why: "First, the U.S. housing market has not reached a bottom. We're not even close," Wang said. "People are watching the U.S. median home price [currently about $206,500], when what they need to scrutinize is inventory levels. We're still at nine-month and ten-month inventories levels in most regions, and a healthy market has only a three-four month inventory level. So don't look for any economic stimulus from the housing sector."

There was a double play in economic reports this morning, and the news was not good. CPI and Initial Jobless Claims both came in higher than expected. Equity futures turned negative across the board after the news was released.

CPI was expected to come in at 0.4% but came in at 0.8% for July. This was still less than the 1.1% number for June. The problem is that Core CPI was 0.3%, ahead of the 0.2% that was expected. This was the same as the 0.3% reported for June and indicates that inflation is not limited only to oil and is working its way into the system.

There was no relief on the employment front either. Initial jobless claims for the week came in at 450,000, which were ahead of expectations. This was down slightly from the prior week but still indicates an extremely weak employment situation.

The focus now shifts to oil, which has recently experienced a substantial decline from its recent peak price. If oil prices continue to decrease, or at least stabilize at this lower price, it takes pressure of the Federal Reserve to raise interest rates. The Fed realizes that the U.S. economy is far too fragile to raise rates. As long as oil prices remain tame, the Fed can minimize the recent CPI numbers and claim inflationary pressures are easing.

However, if oil rallies again, the Fed is in a very uncomfortable position. In addition, a rise in oil prices would not only increase inflationary pressures but also weaken an already battered consumer. For these reasons, the focus is now on oil!

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

Those investors/readers who are of the persuasion that the U.S. stock market is about turn the corner should heed the words of caution from legendary banker Bill Seidman.

"There's always a chance of a large bank failure," Seidman told Newsweek. Seidman chaired the Resolution Trust Corporation, the federally-created liquidator for the last banking crisis in the 1980s.

Keep an eye on the big banks

A large bank failure would quickly extinguish what little momentum the market has established from mid July to early August, during which the Dow Jones Industrial Average has risen from about 10,850 to 11,734. Economist David H. Wang said he will not attach a more-positive descriptive to the 884-point move, because he "doesn't want to create unreasonable, and unjustified, expectations."

"First, our technical analyst friends would say the recent move up is still well within the range of a bear market correction," Wang said. "Second, from a fundamental standpoint, we still have major headwinds."

U.S. worker productivity increased a revised 2.2% in Q2, below the consensus estimate, as companies eliminated jobs without hurting output, the U.S. Labor Department announced Friday.

Economists surveyed by Bloomberg News had expected productivity to increase 2.7% in Q2. Productivity increased 2.6% in Q1. In the past 12 months, productivity is up 2.8%.

Productivity measures output per hour worked. Economists say rising productivity usually leads to increases in income, as businesses can increase salaries/wages paid without increasing their per unit costs.

Meanwhile, unit Q2 unit labor costs, a statistic adjusted for increases in efficiency, increased 1.3%. However, in the last 12 months labor costs have increased just 1.5%. Labor costs increased 2.2% and 4.7% in Q1 and in Q4 2007, respectively.

Economists surveyed by Bloomberg News had expected unit labor costs to increase 1.3% in Q2.

Q2 productivity takes some pressure off Fed

Economist Peter Dawson said the adequate Q2 2.2% productivity statistic, although below consensus, will provide argument support for doves on the U.S. Federal Reserve who want to keep interest rates as low as possible to encourage a U.S. economic recovery.

"Productivity is still rising at a healthy pace. That fact, combined will the relatively modest unit labor costs for the second quarter and year, present a picture that inflation is not getting out of control, which is good news for those seeking lower interest rates, and for business executives," Dawson said. "If these productivity and cost trends continue, hawks on the Fed are going to have a hard time making a case for an interest rate increase at the Fed's next meeting."

Interest rates remain on hold across the pond.

The European Central Bank and the Bank of England kept benchmark, short-term interest rates the same Thursday, as the major central banks chose to take a wait-and-see stance amid the competing challenges of rising inflation and slowing growth.

The ECB kept its key rate, the refinance rate, at 4.25%; the BOE, its rate on commercial bank reserves, at 5%.

The euro and British pound were little changed versus the dollar after the decision. The euro strengthened about three-tenths of a cent to $1.541 and the British pound strengthened one-quarter cent to $1.9516 in Thursday afternoon trading in Europe.

Rates: tougher call for BOE

London-based economist Mark Chandler told BloggingStocks Thursday the Bank of England's circumstance is "a tougher call for monetary policy markers" than the ECB's.

"In the U.K., inflation is rising and the growth outlook is not good, whereas [continental] Europe has a better GDP outlook. So in that sense the Bank of England has a difficult task, similar to the U.S. Federal Reserve's. They have to find a way to bring down inflation from about 4% to 2% without causing a deeper contraction," Chandler said. "Given slowing growth right now, the best stance was to do nothing." The BOE has cut interest rates three times since December 2007.

The lowdown on the high and rising U.S. budget deficit for investors and readers? A triple whammy: higher prices for imported goods, higher interest rates, and higher taxes, among other negative consequences.

The budget deficit is expected to increase to $490 billion in Fiscal 2009, which begins October 1, 2008, Bloomberg News reported Monday. The increased shortfall is due to a worsening U.S. economy, which lowers government receipts, and spending increases for the wars in Iraq, Afghanistan and the housing bailout, among other spending responsibilities.

Increased spending to pay for the housing bailout, including assistance for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) will further increase U.S. Government borrowing, and the supply of dollars, "which almost guarantees that the dollar will fall more," so says currency trader Andrew Resnick. As a result, companies exporting goods to the U.S. are likely to raise their prices, a cost increase Americans will feel keenly.

However, Resnick said the dollar is likely to fall less, if the U.S. government increases taxes or the Fed increases short-term interest rates.

If the leading ECB official is correct, the West is about witness yet another episode of 'That 70s Inflation Show'.

European Central Bank President Jean-Claude Trichet warned Wednesday that euro nations are already seeing the first signs of a wage-price inflation spiral, and called on governments to exercise discipline by not granting wage hikes that could further fan inflation via consequent price rises, The Associated Press reported.

The ECB's governing council "is strongly concerned that price and wage-setting behavior could add to inflationary pressures," Trichet told the European Parliament, while also defending the ECB's decision last Thursday to increase interest rates. "First signs are already emerging in some regions of the euro area."

A wage-price spiral typically occurs when employees and others seek wage increases to keep pace with rising prices. The increased wages ratchet up employer costs, who pass the added costs on to consumers via higher prices, perpetuating the wage-price spiral.

Trichet's concern: Rising European inflation