It's a little more complicated than that. For one thing, people use the word "inflation" to mean two different (but somewhat related) things. When you or I say "inflation" what we really mean is an increase in the cost of living. But even beyond that everyone has a different cost of living - I bought a house this year, and I paid about half what I would have paid three years ago. When the government reports CPI this is part of the calculation.
For the Fed, "inflation" means an increase in the overall money supply. You get an increase in the money supply when people borrow money, and you get a decrease in the money supply when people pay off (or default) on loans. In a macro-economic sense we've been going through a period of pretty severe deflation since the housing market crashed, which is why the Fed is desperately pumping money into circulation. For all the gory details see here:
Actually, house prices are not factored into the CPI per se. The CPI is based on a basket of goods for an urban consumer who rents (so does include rent). If you don't fit that profile, the CPI may well not have much applicability to you....
Aslo, the Fed is not desperately pumping money into circulation. For example, they're paying interest on reserves (that is, paying banks to park money in accounts at the Fed). If they were trying to get money into circulation, the wouldn't be doing that, or would even be charging interest on excess reserves. Both policies have been used by central banks in the past; in fact the Fed didn't use to pay interest on reserves until the recent bank crisis started.
For the Fed, "inflation" means an increase in the overall money supply. You get an increase in the money supply when people borrow money, and you get a decrease in the money supply when people pay off (or default) on loans. In a macro-economic sense we've been going through a period of pretty severe deflation since the housing market crashed, which is why the Fed is desperately pumping money into circulation. For all the gory details see here:
http://globaleconomicanalysis.blogspot.com/2008/12/humpty-du...
tl;dr: You can have a rise in the cost of living and deflation at the same time, just like you can have stable prices during inflation.
p.s. If you don't understand why the money supply increases when people borrow, this is a good (though a bit dramatic) primer:
http://video.google.com/videoplay?docid=-2550156453790090544