There are seasonals in the price indices, and they happen to matter when comparing January with December. Both HICP and CPI ‘should’ fall by about 0.7% in Jan. HICP sa changed little from Oct to Nov, but dipped about 0.5% in Dec. It has dipped about 0.1% further sa in Jan. CPI, mainly due to declining mortgage costs, fell almost 1% sa in both Nov and Dec, and has fallen a further 1% in Jan. The main difference between the two is owner-occupied housing costs, excluded from the HICP. It would be nuts to annualise the sa CPI fall of the last three months, would imply minus 12% or more for the year. Interest rates can decline only a little further.
The annual % change in CPI is now about zero. But the last three months sa has shown an average CPI drop of 1% per month. The (preferable, in my view) HICP seems to be dropping about 0.3% per month for the last two months, would give an annual fall about 4%. The twelve-month HICP figure (meaningless) is still showing +1.1%. I reckon, for what it is worth, that HICP could begin to drop (sa) a bit quicker than CPI over the next few months. There is more sterling pass-through on the way, but maybe not much more from ECB.
These January figures are consistent with recent forecasts of significant price declines for 2009 over 2008. Numbers like minus 3 or 4% for 2009 over 2008 are plausible, even though it is early days. There are obvious implications for indirect tax revenue, and for informally index-linked income variables.