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The finger has been pointed numerous times at the Federal Reserve for laying the foundation for inflation through dollar debasing, and maybe the Fed's objective is to inflate the stock market, and, as a consequence, improve consumer sentiment and combat the ongoing housing deflation.

If only the constant inflationary predictions would materialize, the Fed would be pleased, but reality states that despite the cries, inflation is not happening in the real world. What is happening is an income contraction, and when individuals have less money to spend, prices appear relatively elevated, and eventually pricing will follow the buyer's demand. Inflation cannot occur if there's less money and, more importantly, a consumer unwillingness to create demand that outstrips supply.

Yes, gasoline is around $4 as it was in 2008, but one gallon of milk is not $4 as it was in 2008. It's $2.50. In addition, the consumer's shift to store-brands is well documented, and as an example of deflationary pressure, a store-branded loaf of bread from Kroger (NYSE:KR) costs $1.39 compared with a similar Nature's Own loaf by Flower Foods (NYSE:FLO) costing $3.00, and weighing 4 ounces less.

Grocery retailers' store-brand products are expected to double their share of the global packaged food market over the next 15 years to make up half the market.

Where store-brand products were expected to fade as we emerged from the recession, it didn't quite pan out as pointed out by FoodProcessing.com, and as further indication of the changed American consumer.

As shoppers' economic concerns eased somewhat in the wake of the recession, some industry observers predicted that store brands would give up their recent gains, or even decline as the economy rebounded. The expectation proved without foundation, however, and the return to some kind of pre-recession status quo eluded the national brands. To the contrary, store brands held onto the gains and even built on them.

In total outlets - comprised of U.S. supermarkets, drug stores and mass merchandisers, including Walmart (NYSE:WMT) - store brand sales increased by nearly 2% while dollar share advanced by almost half a point to a new record level. Overall, sales were $88.5 billion, another all-time high, according to The Nielsen Co.

Thus the Fed is focused on preventing deflationary forces from taking hold, although the ongoing data establishes that the dreadful "D" word is alive and well. S&P/Case-Shiller's Housing Price Index (pdf) continues to register an ongoing decline that should have subsided by now if the economic landscape was a garden variety recovery, or recession if one prefers. I know that we're not in a technical recession, but the consumer mood states something different.

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As the graph above illustrates, housing has literally lost the last 10 years of price appreciation, although some areas are better, while others are worse. Meanwhile, the consumer is mentality trapped with expectations of lower prices, while the housing industry continues to operate at 75% capacity.

Economically speaking, opinions and sentiment about where we are and where we're going are best illustrated by the Gallup poll below, interestingly titled "U.S. Weekly Economic Confidence Steady Near Four-Year High."

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The political divide is well defined, with Democrats seeing the glass half-full and getting close to perfection, while Republicans classify current conditions as horrible. Reality is that nothing has changed from the poor conditions of yesteryear, and Independents provide the balance by saying that we're not much worse off, but please spare me party favors because we don't see the economic light at the end of the tunnel either. If anything we've made no progress and are still in negative territory.

Last week, 42% of Americans said the U.S. economy is "getting better" while 53% said it is "getting worse." Four in 10 (41%) consumers rated the current economy as "poor," while 15% rated it excellent or good.

Politics aside, what matters is how the consumer behaves and thus far the sour mood dominates. In addition, let's not forget about the much advertised fact that the consumer accounts for 70% of the economy, although in my book the economy is ultimately driven by the consumer 100% of the time.

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Why is this so called "recovery" different? Over the last 50 years the consumer has never experienced anything like what the chart above depicts, where close to 50% of home equity has evaporated, and homes are the ultimate savings account for most.

During 1995-2007, home equity increased more than gross income for high-, middle- and low-income groups. Continuing problems in the U.S. housing market are a significant concern for the ongoing economic recovery. The drop in U.S. home prices since their peak in 2006 caused household wealth to decline by around $7 trillion.

Thus, we modified our life styles while building $7 trillion in house wealth, never once blaming bankers or anyone else for the goose of the golden eggs, and now must adjust to life without the $7 trillion in the virtual bank.

The Fed proudly displays its monetary policy hammer, but everything looks like a nail to them, and while the much revered institution can step in and prevent banks from catapulting into the abyss through money lifelines, they're worthless when confronted with consumer sentiment that cannot be manipulated with monetary fireworks. Considering that the stock market has risen in earnest during the first quarter of this year, what happens to consumer sentiment and spending if the market stalls or drops? Furthermore, if the Fed's goal is to inflate the stock market without resolving the previous housing bubble, the exercise will be self defeating because capital will flow into stocks, not real estate as the Fed wants.

But the more subtle objective of the Federal Reserve is maintaining the relevance and respect the institution has enjoyed in view of expectations that the Fed's 17,000 employees are entrusted with keeping an eye on the economic ball at a cost of $1.5 billion annually in salaries alone. What were the odds that 1 in 17,000 saw the housing debacle forming and pulled the fire alarm?

Lastly, and at the risk of sounding like a broken record, all the money printed by the Fed never found its way into the economy because the consumer is still dealing with past debt, and is in no mood to celebrate low rates as if we were living during the Greenspan era. Maybe monetary policy will work if Ben Bernanke sets rates below zero where borrowers will be paid to take the money off the bankers' hands - or yet another untried, although appealing, type of stimulus.

Source: Fed's Losing Deflation And Economic Fight