First, the story. Yahoo is carrying the AP story Consumer prices drop record 1 percent in October:

Consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount.

The Labor Department said Wednesday that consumer prices fell by 1 percent last month, the biggest one-month decline on records that go back to February 1947. The drop was twice as large as the 0.5 percent decline analysts expected.

In other economic news, the Commerce Department reported that construction of new homes and apartments fell by 4.5 percent in October to an annual rate of 791,000 units. That was the slowest construction pace on records going back to 1959 and underscored that housing remains caught in a severe slump.

The big drop in inflation reflected not only a huge fall in gasoline and other energy costs, but widespread declines in other areas. Core consumer prices, which exclude food and energy, fell by 0.1 percent last month, the first drop in core prices in more than a quarter-century.

There were price declines for clothing, new and used cars, and airline fares. Analysts predicted further declines in the months ahead as retailers struggle to attract consumers who are being battered by rising unemployment and the weak economy.

Ok. People are now worried about deflation. Those people are late to the party. The early arrivals were those who look at money + credit (marked to market) instead of prices as their measure (and we weren’t the first, either). I’ll repeat: prices are a very lagging indicator of inflation/deflation. Too many people don’t understand this. To be fair, many people understand this, but then don’t understand the reasoning behind M3 being a bad measure as well. In short, M3 doesn’t mark credit to market, and it can’t distinguish between cash borrowed for big purchases and cash being hoarded to survive a future downturn (good luck finding a way to measure the latter). MZM and M’ (M-prime) are much better measures. They also have a better empirical ability to be correlated to market downturns. Mish compares various measures of money supply here. It’s a pretty good read for macro geeks (that’s a nice way of warning against reading it if you aren’t a macro geek).

We’ve been inflationary for so long that people have forgotten what deflation looks like. However, we’ve seen it in our lifetimes in Japan.

I’m not convinced that this is what is moving the market today. Same goes for the housing data. It’s still the auto bailout on everyone’s mind.