Inflation is back

More bad news, if more were needed.....

As if investors didn't have enough to worry about, Friday's batch of economic numbers shows more signs of recession as well as its evil twin--inflation. First, the government reported that U.S. consumer spending rose more than expected in January, but the gain was eaten up by swiftly rising prices.

Then, a Chicago-based business group said U.S. Midwest business activity contracted sharply in February, showing that even areas of the country least affected by the boom-bust housing cycle are feeling ripples from the crisis. On top of that, U.S. consumer sentiment dropped to a 16-year low in February, hitting levels that usually sound the alarm bells of recession, on worries about declining incomes and rising unemployment, a survey showed.

No surprise, then, that stocks opened sharply lower on Friday--and then proceeded to fall even more. Friday's reports were just the latest in a string of worrisome news about the growing threat of recession and inflation.

"Over the last three to four weeks, there have been a string of economic releases that were dramatically weaker than expected," said John Canavan, a market analyst at Stone and McCarthy Associates. "The implications are quite negative for the economy."

The only bright spot: futures traders are now speculating that the Federal Reserve will cut interest rates by three-quarters of a point at its March 18 meeting instead of the half point that was expected previously.