In addition to the punk PPI number, retail sales gained by just 0.1 percent in September. Excluding autos, gasoline and building materials, sales actually declined 0.1 percent. On top of that, the August retail numbers were revised lower, with the headline rate now flat from the originally reported 0.2 percent gain.

Read More The US is closer to deflation than you think

Even Wall Street is feeling the heat. Prices for brokerage-related services and financial advice dropped 4.3 percent in September, accounting for about a quarter of the entire slide for final demand services.

Wednesday's producer price index reading , showing a monthly decline of 0.5 percent, demonstrates a larger problem: At a time when policymakers are hoping to generate the kind of inflation that would indicate strong growth, the reality is that deflation is looming as the larger threat. Declining prices often would be treated as a net positive by consumers, but income weakness is offsetting the effects.

When it comes to the U.S. economy big-picture outlook, the ramifications are more complicated, and not particularly pleasant.

The math is pretty simple: A lack of purchasing power for consumers has led to a lack of pricing power for companies.

On the same day as the two disappointing data releases, Wal-Mart warned that the weakness is likely to extend through its fiscal year, with sales expected to be flat. The warning sent its shares tumbling 9 percent in morning trade, the worst performance in 15 years.

Read More When Wal-Mart plunges, sell these stocks, too



All in all, then, not a great environment in which to raise rates, which the Federal Reserve hopes to do before the end of the year.

"Consumers are growing increasingly uncertain regarding their future income streams and are less willing to finance today's spending with the prospect of tomorrow's improved, future earnings," Lindsey Piegza, chief economist at Stifel Fixed Income, said in a note to clients. "With gasoline prices at multiyear lows, consumers should be spending gangbusters but they aren't."



Wage growth remains elusive for most workers, with the average hourly earnings rising just 2.2 percent annually. Job growth has slowed as well, with average monthly nonfarm payroll additions in the third quarter down nearly 28 percent from the previous quarter.

The data on the ground shoot holes in a number of theories that were expected to drive the economy, market behavior and Fed policymaking.



Read More The Fed is showing that the market matters most



Piegza said the latest numbers should give a boost to those advocating the Fed wait on the sidelines until it sees more evidence of inflation. The Fed has been keeping its key rate near zero for nearly seven years and has expanded its balance sheet to $4.5 trillion though quantitative easing in an attempt to goose economic growth.

"This morning's [retail sales] report ... further bolsters the dovish argument to keep rates lower for longer until price pressures are evident in the economy," she wrote. "The question for the Fed is not when will inflation reverse course back to 2 percent, but, at this point, what inflation?

Economists expected 2015 to be the year the U.S. economy found some level of escape velocity from the post-Great Recession doldrums. The ever-growing prospect of deflation is changing all that.

The news isn't better elsewhere in the world, either. Fresh releases overnight saw China consumer prices rise 0.1 percent on a monthly basis and the yearly increase was just 1.6 percent, while Japan and India saw declines in wholesale prices that were more than expected.

"The U.S. economy remains the strongest in the developed markets, but there are cracks emerging," Bank of America Merrill Lynch said in a report for clients this week.



In response, BofAML has cut its outlook both for gross domestic product gains and the stock market. The firm now sees second-half GDP rising just 2.4 percent, from the previous 2.8 percent projection. Equity strategist Savita Subramanian has sliced her end-year forecast for the from 2,100 to 2,000 — about flat from the current level — and reduced her 12-month expectation for the index from a gain of 14 percent down to 8 percent.

Read More Recession buzz is heating up on Wall Street



Given an increasingly difficult set of circumstances, the Fed will struggle to justify a rate increase.



Forecasting firm Capital Economics, which has been expecting rate hikes going back to March, now believes nothing is likely to happen this year. Paul Ashworth, Capital's chief U.S. economist, cut his GDP expectations for the third quarter to 1.7 percent.

Other expectations are more pessimistic: The Atlanta Fed is projecting 1 percent growth, which is where JPMorgan Chase cut its target to on Wednesday, down from 1.5 percent.