In June, the Consumer Price Index (CPI) increased only 0.3%, while core inflation (which excludes food and energy) rose by only 0.1% -- the smallest monthly increase in core inflation since the start of 2004.

The U.S. dollar fell dramatically on world currencies exchanges on the news, while most other currencies rose in value. Bonds rose too, as the "for-sure" bet the Fed would continue its "measured" interest rate advances became "not-so-sure."

Readers are very familiar with my long-standing view on deflation -- I believe it is a real threat that never went away. In fact, it is such a fear that the Fed has only discussed it very little in its official statements at its regularly scheduled meetings.

If the bond market action is not worried about inflation; if the stock market is deflating; if consumer prices for most items are declining; and if only housing has been inflating... is deflation not a real threat?

Cheaper imports from China, courtesy of Wal-Mart, are bringing prices down. Yes, low-priced items being manufactured abroad are declining in price, but so are mid- priced items like computers, TV/audio and appliances. (Please see tomorrow's PROFIT CONFIDENTIAL for a great commentary on how U.S. appliance manufacturers are actually closing their doors).

What will happen once real estate starts deflating too? I'll tell you what will happen: At that time, all major forms of investment will be declining in price along with consumer items. This means assets (except gold) will decline in price, making debt difficult to manage.

From day one, when all the "noise" surrounding the Fed's "measured" interest rates increases came out in the popular media, I was one of the rare economists who did not buy the theory that the Federal Funds Rate would rise to 3.5% to 4% by the end of 2005 -- as all the major banks and brokerage houses were predicting.

The threat of deflation has been there all this time -- it never went away. Fed Chairman Greenspan is well aware of the deflation risk. He will not let rates rise when inflation is dormant; however, he will ease rates on the slightest inclination of a deflation threat.