Tony Crescenzi
Senior VP,
Strategist,
Portfolio Manager
Pimco

In arguably one of the most useless pieces of economic news ever, core producer prices increased 0.4% in October, topping forecasts for an increase of 0.1%. The stat is the pretty much the only one within the producer price report that sends a message of rising prices; everything else points to deflation—significant deflation.

The record 2.8% drop in overall prices sends the deflation message loud and clear. It beat the previous record drop of 1.6% set in October 2001, and is the largest since record-keeping began in 1947.

The 0.4% gain in core prices is old news, as can be seen in the components that caused the increase. For example, there was a 1.6% gain in the price of metal machine tools, a 4% increase in the price of tires, a 2.6% increase in the price of light trucks, and a 0.7% gain in the price of appliances. The common denominator for all of these is that they reflect prices pressures now gone with the wind. One price increase that reflects a new trend is the trend in the price of mobile homes, which increased 1.2% in October following a 0.8% increase in September. Perhaps the increase reflects recent foreclosure activity, which has forced home owners to trade down to smaller homes.

The deflation picture is most glaring in the prices of goods in earlier stages of the production process. Crude materials, which reflect materials at the earliest stage of the production process, fell 18.6% overall and a record 17.0% excluding food and energy, beating the previous record set, astoundingly, just a month earlier when prices fell 9.4%. Prior to September, the previous record was 1 7.7% decline in February 1975.

• Pessimism Grows Among US Industrial Execs: Survey

Intermediate goods prices, which reflect the prices of goods at the middle stage of the production process, fell 3.9% overall, a record drop that beat the previous record of -2.3% set in April 2003. Core intermediate prices fell a record 1.7%, beating the previous record of -0.5% set in July 2001.

The massive declines in prices at earlier stages of production underscore the deflationary tendency that exists in the economy at the moment and which will exist for many months to come. More: Click for Latest Economic coverage ...

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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market." Crescenzi is a contributor to RealMoney.com."

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