The U.S. Producer Price Index for December came in flat on the headline, down 0.3% on the core rate. Both readings were below expectations.

BMO Nesbitt Burns says that the PPI provided more good news for fixed-income markets today. This was the second monthly decline in a row. Consensus was +0.3% for the headline and +0.1% growth in core prices, Nesbitt notes. “A hefty 2% drop in car prices and a 1.6% reduction of light truck costs were the big movers in core inflation in December,” it says.

CIBC World Markets says that the PPI offers, “further evidence that deflation remains the dominant theme in a margin-squeezed US goods sector.”

Separately, it was reported that business inventories rose an on-consensus 0.2%, all of it at the retail and wholesale level. RBC Financial Group economists notes that the inventory-to-sales ratio remained at 1.36 for the second straight month, slightly higher than the record low of 1.35. “The low inventory-to-sales ratio can be largely attributed to the U.S. economy’s current weakness, with businesses avoiding unnecessary costs while margins remain pressured. Nevertheless, the low ratio suggests that businesses are operating relatively efficiently and thus, it remains a positive factor for the economy’s eventual recovery,” it says.

“We regard the year-end drop in core inflation as a Michael-Jordan-quality head fake,” concludes Nesbitt. “Markets will likely sign on to the idea that inflation is dead and prices might even be falling. But at earlier stages of processing, prices are firming. And with the dollar dropping, import prices are starting to rise. So, PPI is likely to firm during the first half and start a normal cyclical drift upward. No question, however, that any rise in goods inflation is starting from a very low base.”

CIBC predicts that core PPI rates should remain close to zero in year-over-year terms providing downward pressure on CPI. “This very benign inflation environment leaves room for further rate cuts from a deflation-wary Fed.”