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Falling French inflation sparks hope of end to Europe’s price surge

Lower energy prices helped push inflation down in France, as European stocks rose on growing expectations that inflation has peaked across the region.

French inflation fell to 6.7 per cent in the year to December, against economists’ expectations of a slight rise following the 7.1 per cent figure recorded for November.

European stocks built on their early 2023 rally after the inflation report came out. The region-wide Stoxx 600 rose 0.9 per cent, leaving it up almost 3 per cent this week. Shares in the region are on track to post one of their top five performances for the first five trading days of any year since 1987, according to Financial Times calculations based on Refinitiv data.

The measure of harmonised prices — produced by Insee, France’s statistics agency — follows similar slides in Spain and Germany and boosted expectations that headline inflation in the eurozone will fall sharply following last year’s surge to double-digit levels.

Bourses in France, Germany and Spain have all rallied by a similar margin in the first trading days of the year on the back of the better than expected data.

A sharper than expected fall in inflation during the early months of 2023 would allow the European Central Bank, which increased borrowing costs aggressively over the course of 2022 to counter record-high prices, to stop raising rates before the summer.

Eurozone inflation is expected to drop into single digits for the first time in three months on the back of the fall in energy prices paid by the region’s households and businesses — a consequence of measures from the region’s governments to keep the cost of gas in check and warmer than usual weather in recent months.

December price data for the bloc is published on Friday. Economists polled by Bloomberg predict a decline to 9.5 per cent — the lowest level since August and far below the October peak of 10.6 per cent.

Claus Vistesen, an economist at Pantheon Macroeconomics, said this week’s price data pointed to “a significant downside surprise” in Friday’s eurozone inflation figures, predicting a fall to as low as 9 per cent in the headline rate for the bloc.

Governments’ borrowing costs have fallen slightly, with the yield on France’s 10-year sovereign bond declining 0.1 percentage points this week to 2.82 per cent, while the German equivalent has dipped by 0.07 percentage points to 2.3 per cent.

However, the data out this week also indicate that, while falling energy prices have reduced overall inflation, underlying price pressures for other goods and services have remained largely unchanged or even continued to increase. Core inflation — which excludes changes in energy and food prices — rose in Spain, and Germany reported higher services inflation although in France the pace of price growth for services also slipped.

Vistesen said the lack of a fall in underlying pressures would “keep the ECB on alert at the start of the year”. 

Economists still expect the bank to raise its deposit rate by half a percentage point in February and March, taking it to 3 per cent. The euro traded 0.7 per cent higher against the dollar at $1.061 on Wednesday, despite the French inflation figures coming in cooler than expected.

Headline inflation in the region is expected to drop sharply in the spring, as the impact of last year’s surge in energy prices falls out of the annual index.

Carsten Brzeski, head of macro research at ING, said price pressures “could — temporarily — fall to 2 per cent before the year end” — a level in line with the ECB’s target.

France’s finance minister Bruno Le Maire told France Inter radio that inflation would track downward over the course of this year.

Earlier and more aggressive government energy subsidies have helped to shield the country from the double-digit surge in consumer prices that has swept across much of the rest of Europe.

Analysts polled by Reuters had expected an increase to 7.3 per cent in the French number.

Rayna Prime

Rayna Prime

Rayna Prime Editor