It’s the classic sign of a sagging economy: inflation falling fast as the cost of goods and services shrinks under the weight of falling demand and rising unemployment.

In the current case of the US and the UK there’s also the influence of the credit freeze that is cutting demand across the board, while plunging oil and petrol prices are adding their weight as demand dries up.

Retail sales are negative as consumers stop spending, car sales are falling and companies across the board are cutting spending on advertising, marketing and other services. House prices continue to fall, home foreclosures are still growing. Despite all the talk, the American Government hasn’t started tackling the root cause of the problem, the depression in housing which is slashing prices and home values.

It’s a similar story in the UK where there’s no easing in the rate of fall in house prices, with hundreds of thousands of properties on the market for rent because their investor owners can’t afford to move in, or have sold them to other buyers and taken a loss.

Normally a fall of 2.8% in a month in producer prices, like the US saw in October, would be good news: pressure off inflation, interest rates and all that. But these are not usual times.

October is rapidly emerging as the tipping point (a term beloved of strategists and others for an important point in history), when the US economy when from slowing into a recession, to falling off a cliff. Other economies are starting to exhibit similar characteristics. The turmoil caused by the collapse of Lehman Brothers on September 15, and then the spate of bank rescues and bailouts in the US and Europe, plus the flood of guarantees, are also emerging as the catalyst for the dramatic plunge in confidence and economic activity.

That 2.8% fall in final producer prices in the US in October was the largest since records started in 1947, followed a 0.4% drop in September, and left the annual increase at 5.2% in the 12 months to October, compared with a 9.8% annual rate in the year to July.

Core producer prices excluding food and energy costs rose by 0.4% and were up 4.4% over the last 12 months, the steepest increase since 1989 and a sign that like Australia, inflationary pressures remain embedded in the economy.

But they will pass as the slump in overall activity continues into 2009. America’s Consumer Price Index is out tonight and economists are tipping a fall in the headline rate of 0.8%, which could be another 60 year low.

In Britain it was a similar story with consumer prices: down a record 0.7% in October to an annual rate of 4.5%. Brits are starting to worry about price deflation in 2009. US commentators are becoming nervous as well. In a year’s time we could be seeing some very nasty figures for wholesale (producer) and for consumer price movements in the US, the UK and Japan where deflation is likely to appear sooner than in most other major economies.

Figures released by the US real estate agents’ association, the National Association of Realtors, showed that home prices fell in 80% of US cities in the September quarter, driven primarily by the rising level of foreclosures.

The median price of a U.S. home fell 9%, according to figures from the Association from the same quarter of 2007 and sales of properties with mortgages in default accounted for at least a third of all sales in the same period. Prices fell in 120 U.S. metropolitan areas, rose in 28 and were unchanged in four.

The Association said its figures showed that the biggest falls were in California with the prices down around in San Bernardino by 39% in its median home price; Sacramento saw a 37% plunge, San Diego 36%. Median prices rose 13% around Elmira in New York state, 8.7% around Decatur, Illinois and 8.1% in Bloomington, Illinois.