A lack of inflation is one thing, but actual deflation is something else.
Something else that we've got, actually, judging from today's producer price index figures.
According to the U.S. Commerce Department, the U.S. producer price index (PPI) plunged by 1.6 per cent during the month of October. That is the biggest monthly drop on record, and way more than the dip of 0.4 per cent that the market expected.
The core producer price index, which excludes the volatile food and energy components, declined by 0.5 per cent during the month. That one had been expected to decrease by 0.1 per cent. On a year over year basis, the all-items PPI was down by 0.4 per cent, while the core index rose by a tame 0.8 per cent.
The PPI shows us what all kinds of producers-from farms to high-tech companies-get for their products. We used to look at it as a way to scout for inflationary pressures. Now maybe we should see it as a barometer of the weakness in the U.S. economy.
Hint: if everyone has to slash prices to move goods, then the economy cannot be very strong.
October is the month that new car lines get introduced. Generally speaking, that means that the average price of cars goes up. Not so this year. Motor vehicles prices were down by 4.7% on the month. Gasoline prices were down by 21%. Overall, total finished goods prices declined by 2% during the month.
But enough with the numbers. Here's the big picture.
Earlier this week, the Bank of Canada basically told us that they were not worried about inflation. Judging from today's numbers, nobody south of the border needs to fret about it either. Which means that those who make the decisions at the Federal Reserve (are you there Mr. Greenspan?) can keep on slashing.
With the news lack-of-inflation news, long term bond yields dropped smartly. This is the part of the yield curve that reflects inflation expectations. For good measure, the yields at the short end also dropped. They are most responsive to interest rate expectations. In fact on both sides of the border, we are in historical-records territory in terms of bond yields.
We are also mired in record-setting territory in terms of the Canadian dollar. The old 63 cent U.S. benchmark for the loonie now seems like a happy memory. Evidence of soft demand in our biggest trading partner is not likely to buoy our currency anytime soon.
Next week we find out what's going on with prices at the consumer level.
Stay tuned.