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The good news is fund managers have become less worried about the possiblity of a recession than they were a month ago. The bad news is that’s where the good news ends.

A vast majority of managers believe we are mired in a world of below-trend growth and above-trend inflation, according to Merrill Lynch’s latest survey of global fund managers. Three months ago, 67% of the panel was bracing itself for stagflation; this month that percentage has risen to 85%.

On the growth front, optimism is rising. Fund managers are marginally less negative on expectations for both economic growth and corporate earnings, the survey showed. The percentage of panelists thinking that the world is already in recession fell from 24% in April to only 18% in May. At the same time, the percentage of managers of the opinion that a global recession would be “likely” in the next 12 months fell from 40% to just 29%.

But this month also saw a sharp rise in the net balance expecting inflation to rise over the coming year. A quarter of the respondents now say they expect global core inflation to rise in the next 12 months, compared with only 7% in April.

“Stagflation fears are gripping investors, but inflation concerns are fast overtaking worries about economic growth,” the survey said.

All this doesn’t bode well for equities, especially given the stock market’s 10% bounce since its March lows. Gloom about the corporate-profit outlook remains, with a net 77% of those polled thought consensus estimates for global corporate earnings were still too high.

“This may explain why investors are starting to question equity valuations - only a net 15% of the panel now think stocks are undervalued, compared with 26% in April,” the survey said.

Growing inflation fear is also prompting predictions of higher bond yields, with 80% of respondents expecting long-term rates to be higher a year from now. “Evidence is pointing to a possible sell-off in bonds,” according to the survey. And a sharp rise in bond yields “could help convert this financial crisis into an economic crisis.”

Whole Foods Market appears to be hurting from grocery sticker shock and ambitious expansion plans. The stock took a beating Wednesday after reporting second-quarter results that missed Wall Street expectations - for the third quarter in a row - and after offering guidance that Credit Suisse called “equally disappointing.”

The Austin, Texas-based supermarket chain, which brands itself around its “natural,” local and organic food and merchandise offerings, posted earnings 1 cent a share below the consensus estimate and forecast third- and fourth-quarter earnings to fall from a year ago.

On Wednesday analysts said new stores are continuing to impact returns and that the Wild Oats acquisition is proving challenging: Wild Oats stores added a 6-cent hit to Whole Foods’ second-quarter profit. The company is also seeing margins contract as new stores open, a scenario that’s unlikely to change any time soon, analysts said.

The higher-priced supermarket chain is also losing customers who are hurting from higher prices for the gamut of necessities, from gas to bread. Food inflation shot up to 5.9% in April from 4.7% in March, with every category except meat moving up, and the breadth of the increase suggesting this level of inflation may remain for a while, Goldman Sachs noted Wednesday.

Morgan Stanley said the impact of the ongoing “grocery trade-down” is exacerbated by Whole Foods’ heavy exposure to markets that are feeling the pinch and punch of the real estate bubble. In a note to clients Wednesday, analyst Mark Wiltamuth said more than half of the company’s California locations include “bubble” markets; California makes up around 30% of the total store base for Whole Foods.

“We have consistently cautioned that the [comparisons] could slow with the weaker economy, and the company’s exposure to California… We expect consumer trading down to continue as food inflation drives sticker shock in the grocery aisles throughout the balance of the year,” he wrote.

So what are the prospects for the company’s growth?

Back in February, when it reported first-quarter results, Whole Foods said sales “have been highly resilient during economic downturns,” suggesting the current recessionary period might not hurt the company.

“We attribute our strong sales to many factors, including our loyal core customers and their dedication to a natural and organic lifestyle, our high percentage of perishable product sales, and our extensive selection of high-quality prepared foods that attracts customers trading down from restaurants,” cofounder and chief executive John Mackey said in a statement released with first-quarter results.

But Tuesday’s numbers showed comparable store sales at the supermarket chain dawdling to their slowest growth rate in a year, Think Panmure analyst Suzanne Rice wrote to clients Wednesday.

“This leaves us questioning the company’s ability to accelerate comps in this retail environment,” she said.

Rice maintained an accumulate rating for the stock and said Whole Foods will likely continue to lead the natural foods industry as the sector grows. But her long-term take on the company was somewhat muted. “We believe that margins will begin to improve toward the latter half of 2009 and into 2010, though returns on investment may never get back to the levels they were when Whole Foods was in a higher-growth mode.“

With record oil prices standing alongside mortgage market woes and general fears of a recession, it’s no surprise that, going into the busy summer travel season, the price at the pump is on the mind of nearly every American . It’s also on the mind of America’s elected officials, who are tending to an electorate that is increasingly demanding action to bring the price of oil down.

On Tuesday, the House of Representatives and Senate voted decisively to cease depositing oil in the nation’s strategic petroleum reserve (SPR) in an attempt to do just that. The measure was passed by a landslide 385 to 25 vote margin in the House, while the Senate passed it 97 to 1. (Both Hillary Clinton and Barack Obama supported the measure, while John McCain didn’t vote.)

No elected official wants to be on the side of anything that could potentially lower gas prices, but how effective will the measure be?

Not at all, apparently. That’s according to Megan Barnett, a spokeswoman at the Department of Energy, who said that the “very modest rate” that oil is deposited in the reserve “has no appreciable impact on gas and oil prices.”

Her math makes sense. About 70,000 barrels are deposited into the SPR a day, which represents a miniscule 0.4% of the roughly 20 million barrels used each day by the U.S. (As of yesterday, the SPR was housing 702.7 million barrels, equal to 97% of its roughly 727 million barrel maximum capacity. With a full tank, it can serve the nation’s oil needs for about 36 days.)

Giving 70,000 extra barrels a day to a country that uses 20 million will provide some relief, but given the size of consumption compared with the size of the relief, it could end up being equivalent to loosening your belt one notch after eating 100 Thanksgiving dinners.

Nonetheless, House Speaker Nancy Pelosi speculated that the move could ease gas prices by 5 cents to 24 cents a gallon. Others disagreed. Joe Barton, the top Republican on the House’s Energy and Commerce Committee said that “if all the members of the House would go out onto the steps and clap our hands three times and say, ‘Down prices, down prices,’ that would have as much impact as passing this bill.”

Wall Street is on track to open lower Wednesday ahead of a key retail inflation report, with earnings from Electronic Arts Inc. and Whole Foods Market Inc. supplying an early focus.

According to spread bettors IG Index, the Dow Jones industrial average is expected to open down about 2 points at 12,830. S&P 500 futures were down 1.80 at 1,402.90, while Nasdaq 100 futures fell 3.50 to 2,002.50.

Wall Street turned in a mixed performance Tuesday after a fresh report on retail sales and a new oil price record. The Dow Jones industrial average fell 44.13, or 0.34%, to close at 12,832.18, the Nasdaq composite index rose 6.63, or 0.27%, to 2,495.12, and the Standard & Poor’s 500 index dropped 0.54, or 0.04%, to 1,403.04. The yield on the benchmark 10-year Treasury note rose to 3.91% from 3.80% late Monday, and oil prices settled up $1.57 at $125.80 a barrel on the New York Mercantile Exchange.

ECONOMIC DATA:

• Consumer price index for April, 8:30 a.m. ET, 0.3% estimate

EARNINGS HIGHLIGHTS:

Company                 Symbol    Period     Estimate

Agilent Technologies      A         2Q       $   .48
Deere & Co.               DE        2Q          1.75
Freddie Mac               FRE       1Q          (.92)
Jack in the Box           JBX       2Q           .43
Macy's Inc.               M         1Q          (.02)
Stanley Inc.              SXE       4Q           .31

Figures in parentheses denote losses.

AFTER-HOURS ACTION:

After Tuesday’s close of trading, Applied Materials Inc. said its fiscal second-quarter earnings fell 27%, but the results still matched Wall Street’s expectations. Electronic Arts reported fourth-quarter adjusted earnings of $30 million, or 9 cents a share, beating the mean break-even estimate of analysts polled by Thomson Reuters. Whole Foods Market Inc. said fiscal second-quarter net income fell 13%, as the company integrated its Wild Oats acquisition.