Investors and traders are constantly bombarded by inflation data that doesn't jive with the anecdotal evidence, or rhetoric about the waning consumer that doesn't jive with the data. The resulting uncertainty has kept stocks in a range for about three months now.

Monday's session continued the frustrating pattern as major indices staged another angst-ridden 'kickback' of early gains. The

Dow Jones Industrial Average

jumped more than 100 points intraday Monday on news of a cease-fire in the conflict between Israel and Hezbollah and accompanying weakness in crude prices. But the Dow and the other major indices suffered another afternoon swoon, once again unable to break out of ranges they've been stuck in since May.

The Dow ended the day up 0.9% to close at 11,097.87, after hitting 11,202.78, while the

S&P 500

gained 0.12%, to 1268.21, after approaching its 1280 resistance level intraday. The

Nasdaq Composite

gained 0.55%, ending the day at 2069.04, after reaching 2092.66.

Major averages were restrained (again) by cyclical stocks such as

Alcoa

(AA) - Get Report

and

Caterpillar

(CAT) - Get Report

, and buoyed by chip stocks such as

Broadcom

(BRCM)

-- although the Philadelphia Stock Exchange Semiconductor Index finished well off its intraday highs as well.

Most traders and investors want the

Fed

to stop raising rates because they are concerned the economy is slowing too much, as evinced by recent weakness in cyclical stocks.

A weak economy puts jobs in jeopardy, squeezes profit margins and can cause a credit crunch for individuals and businesses. But rampant inflation poses a great danger as well -- including politically.

On Tuesday, the Bureau of Labor Statistics reports the July producer price index, and Wednesday, the consumer price index. PPI is expected to rise 0.4%, with the core rate rising 0.2%. The consensus expects Wednesday's CPI to increase 0.4% in July, and core CPI to jump 0.3%. Such readings would mark the fifth-consecutive 0.3% gain this year.

As it stands, CPI puts headline inflation running at 4.3% year over year, and core inflation (which removes energy and food costs) at 2.6%. The personal-consumption expenditures index reveals a 3.5% year over year increase, with core PCE up 2.4%. And wage inflation, measured by unit labor costs, is up 3.2% year over year.

"If you're on the receiving end of a consumer price index, you're being cheated," says John Williams, founder of economic newsletter ShadowStats.com and an economic consultant. Williams is mistrustful of the government's measures of inflation, and he's not alone, because the federal government has incentives for CPI to be lower. The statistic is tied to cost-of-living increases made to Social Security beneficiaries, to commercial leases and union labor contracts among other types of contracts.

CPI is like an M.C. Escher drawing in which down is up and up is down. During the Clinton administration, CPI was altered to measure inflation using "geometric weightings" of the priced goods. This means that the statistics take into consideration consumer behavior -- when steak costs too much, people buy ground beef. So, if steak got very expensive, it is weighted lower and ground beef higher in the overall calculation of CPI.

"Unfortunately, the calculation of CPI will always suffer from a degree of arbitrariness," says John Lonski, chief economist of Moody's Investors Service.

Even though all of the government's inflation measures show the trend is northward,

anecdotal evidence suggests inflation is higher than any government statistics show. Williams says inflation is running at 8% year over year if CPI was calculated by the methods used prior to the first Bush administration. Using his own adjustments to remove geometric weightings, he believes inflation is about 11% year over year. Using the BLS statistics going back to 1980, social security payments would be 70% higher today if CPI was measured the old way, says Williams.

And the government might just have a way to lower CPI even further.

Just as investors and the media have picked up on how owner-equivalent rent is putting upward pressure on CPI, the Bureau of Labor Statistics published a paper in May outlining an experimental CPI that removes owner-equivalent rent from the calculation. According to the report, between 1997 and 2005, the experimental CPI gained 20.8%, while reported CPI grew 21.7%. The difference would ostensibly be greater in 2006, as rental prices have increased more intensely.

"How long until

Fed chairman Ben Bernanke reaches across the table for that one," quips James Bianco, president of Bianco Research.

Whatever the numbers, the Fed and the government are using the government's statistics to adjust monetary policy, and many economists say the Fed is tolerating too much inflation. Bernanke and the Fed have asked the markets to bet on the Fed's forecast, which calls for slowing growth to stamp out inflation. "Historically, that relationship isn't reliable," says Mickey Levy, chief economist at Bank of America and member of the Shadow Open Market Committee, a group of economists that meet to evaluate and critique the Fed's policies.

And how slow is growth anyway? The impact of the slowing housing market is overstated, say Lonski and Levy, particularly when it comes to the impact on consumer spending. On Friday, the Commerce Department reported that July retail sales increased 1.4% from the prior month -- much higher than the 0.9% increase economists expected. "Consumption growth will be more resilient than people realize," says Levy.

Meanwhile,

Dillard's

(DDS) - Get Report

became the latest retailer to post strong earnings, and rallied Monday in reaction.

Economists say the consumer's resilience is due to the strong labor market. The Labor Department has reported four months of soft payroll reports and a rise in unemployment in July. But some data suggest that consumers and employment are doing better than the official stats reflect.

Tax-collection data show a surge in small business and self-employment that has boosted the economy in ways the government statistics haven't picked up, writes Charles Biderman, CEO and publisher of Trim Tabs Investment Research. "Based on real-time income tax data -- both withholding and 'other' -- that neither the BEA nor the BLS bothers to use -- take-home pay soared 9.4% year-over-year in June and July," he writes, adding that jobs must have been growing at more than 250,000 per month.

As per the usual confusion, the fed funds futures market has increased the chances of a rate hike in September to 25%, up from 20% Friday, according to Miller Tabak. The market has priced in 52% odds of a hike in October, up from 42% Friday, and 60% odds for a 5.5% fed funds rate by December, up from 48% Friday.

So as the inflation data rolls in this week, the market is likely to react to every decimal point. But savvy investors know it is probably less damning than it could be -- or really is.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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