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Let's speak clearly here.
1. smaller diameter THAN STOCK (this is important because a smalll tire than what is currently on the vehicle MAY NOT be the stock size) will produce higher rpms and worse mileage.
2. A larger diameter than stock will produce a lower rpm thus better mileage.
IGNORE the speedometer/odometer.
I use a gps set on meters instead of miles to to calibrate my Scangauge. (setting to meters gives a more exact measurement to set by.) I then change back to miles.
Once I have the gps and scangauge giving me a precise mph reading I tend to ignore the speedo.
IF you want more tourgue to tow then smaller diameter MIGHT achieve that, given load wieghts. But a smaller tire will not....in general produce better mpg.
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