Yesterday’s economic news was at best a mixed bag, with indicators all dropping, but not as much as analysts expected.  Stocks rallied a bit on the news, picking up about 1% — but don’t expect that to last.  Today’s news was all bad, starting with news that consumer inflation has reached a three-year high without any evidence of economic strength:

The Labor Department said on Wednesday its Consumer Price Index, excluding food and energy, increased 0.3 percent, the largest gain since July 2008, after rising 0.2 in April.

Core inflation was lifted by steep rises in motor vehicle and apparel prices and economists had expected the measure, which is closely watched by the Federal Reserve, to rise 0.2 percent last month. …

But in the 12 months to May, consumer prices rose 3.6 percent, the biggest jump since October 2008, and well above expectations for a 3.4 percent increase.

The New York manufacturing index fell into negative territory, after analysts expected a mildly positive result:

Separately, the New York Fed’s “Empire State” general business conditions index fell to -7.79 from, contracting for the first since November, from 11.88 in May, surprising economists who had expected a rise to 12.50..

In a separate report, overall industrial output in the US rose “just 0.1%,” below expectations:

U.S. industrial output edged up just 0.1 percent in May as supply chain disruptions from the earthquake in Japan disrupted auto production for a second straight month, the Federal Reserve said on Wednesday. …

Economists had looked for a 0.2 percent increase in industrial output.

Capacity use, a measure of how close firms are to running their facilities at maximum capability, was flat at 76.7 percent, below the average over the past three decades.

Suitably Flip notes that the S word — “stagflation” — will start appearing in economic reports soon:

Until now, many had held that manufacturing remained the bright spot in an increasingly wobbly economy.  With this notable miss (and the concurrent inflation surprise), MarketBeat advises you to brace for the S word.

“Core is up 1.5% year-over-year, which is still awfully low. Headline inflation was up 3.6% from a year ago. You’ll be hearing about stagflation this morning, probably, whether real or not.”

Flip also reminds readers that jobless claims and housing market data will come tomorrow, none of which will be likely to please the markets.  Today’s data indicates that we’re experiencing a significant slide in the economy and a crisis in confidence in Obama administration policy.  So far, consumer spending still demonstrates some strength, but it won’t be long before buyers start protecting their own capital.