The Labor Department reported a modest increase in consumer prices in September. The increase in the consumer price index was .2% but it was 1.3% lower than last year.

Core CPI also rose .2% The core index excludes food and energy.

There were price increases in used cars and trucks, apparel and medical care. Energy prices climbed .8% in September.

Just call them dueling worldviews, or outlooks. In one corner is economist Joseph Stiglitz, who sees deflation as the primary threat to the U.S. economy, in the quarters ahead.

"Deflation is definitely a threat right now," Stiglitz, an economics professor at Columbia University, told Bloomberg News. "The combination of the deflation threat and the sluggish recovery should keep the Fed on hold for quite a while."

Don't be confused by the rhetoric you read and see in the media. We are definitely in a deflationary spiral. Who says so? And what data are you looking at?

Let's read a few quotes from leading traders and analysts:

• Nobel laureate Joseph Stiglitz said: "Deflation is definitely a threat right now."
• Charles Evans, Federal Reserve bank president says: "Disinflationary winds are blowing with gale force effect."

In another sign of how companies have been forced to adapt to changing economic times, the average price for an American hotel room dropped 17% (year-over-year) during the first six months of 2009.

The average traveler booking a room in the U.S. can now expect to pay $115 a night, down from $139 during the first half of 2008. New York City and Washington D.C. were the priciest destinations on the list, although Las Vegas is the most popular destination. Gaming fans can grab a room in Sin City for an average of $82 per night.

Another record deficit, a Geithner likely tax boost, and higher import prices failed to significantly spook the markets even after a five or day run-up. Based on the late day recovery, where this close was going to end up was an unknown until right at the closing bell. The day was a very light day for news, so here are the closing bell levels (unofficial close):

Dow 9,603.98 -23.50 (-0.24%)
S&P 500 1,042.73 -1.41 (-0.14%)
Nasdaq 2,080.90 -3.12 (-0.15%)

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John Crudele over at The New York Post writes about yet another hidden consequence of the Cash For Clunkers program: "... the folks at the US Bureau of Labor Statistics confirmed to me that the subsidy received by those 800,000 car buyers will be handled in the CPI next week as if the price of a car fell by $4,500."

Let's be very clear: This is one of the dumbest things in the history of the United States.

How the hell can you possibly count a taxpayer-funded subsidy as free money and use it to show that the cost of cars fell?

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.