There's That D Word Again

Deflation.

US producer prices dropped an unexpected 0.6 percent in September, mainly because of a 2.4 percent decline in energy prices, the Labor Department said Tuesday.

Analysts polled by Reuters had anticipated prices would remain unchanged after they rose an unrevised 1.7 percent in August. Prices paid at the farm and factory gate also fell 4.8 percent on the year, which was steeper than forecasts of a 4.2 percent drop.

Excluding food and energy, prices declined by a much slimmer 0.1 percent in September.

Now granted, that was September. October's numbers will be different, I expect. But that yearly price drop number is rather worrying. It shows even with the stimulus plus six months, prices still fell. That's not good in the long run.

Once again the big problem is home prices, and they keep falling and will keep falling for some time.

Home values are predicted to drop in 342 out of 381 markets during the next year, according to a new forecast of real estate prices.

Overall, the national median home price is predicted to drop 11.3% by June 30, 2010, according to Fiserv, a financial information and analysis firm. For the following year, the firm anticipates some stabilization with prices rising 3.6%.

In the past, Fiserv anticipated the rapid decline in home-sale prices over the past few years -- though it underestimated the scope.

Mark Zandi, chief economist with Moody's Economy.com, agreed with Fiserv's current assessments. "I think more price declines are coming because the foreclosure crisis is not over," he said.

In fact, those areas with high concentrations of foreclosure sales will experience the steepest drops, according to Fiserv. Miami, for example, is expected to be the biggest loser. Prices are forecast to plunge 29.9% by next June -- after having already fallen a whopping 48% during the past three years.

Still a lot more pain to come, folks How many homeowners will end up underwater here in the next nine months and onwards? How many more foreclosures will strain state and local tax revenues as they are revised downwards? The stimulus will run out of steam in 2010. What will we be left with then? Rising unemployment, still, and banks that still aren't properly regulated for starters...

Falling home prices equals massive deflation, folks.