French inflation unexpectedly slowed in December, adding to signs of easing price pressure throughout the euro area.
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French inflation unexpectedly slowed in December, adding to signs of easing price pressure throughout the euro area.
With slower energy and services inflation, consumer prices rose 6.7% from a year earlier after record increases of 7.1% in October and November. Economists surveyed by Bloomberg expected an acceleration to 7.3% in the final month of 2022, in part due to the government beginning to phase out fuel discounts.
Inflation in Germany also slowed more than anticipated last month, according to figures released on Tuesday, and data on Friday for the entire euro area is expected to show another slowdown to 9.5% from 10.1% previously.
The signs that inflation may have peaked is a relief for European Central Bank policymakers. The Frankfurt-based institution already opted for a smaller half-point rate hike at its last meeting after data showed inflation slowed in November.
Euro-area government bonds advanced after the latest French figures, while traders curbed bets on the peak rate in the ECB’s hiking cycle, pricing around 146 basis points of additional tightening by the middle of 2023, down from around 152 basis points at Tuesday’s close.
A warmer-than-expected start to winter could also temper some of the cost pressure as demand for energy proves softer than anticipated. Yet Bundesbank President Joachim Nagel cautioned earlier this week that further monetary policy action is still needed to halt and reverse a trend of increasing inflation expectations, and markets expect 50 basis-point increases at the next two meetings.
Short Reprieve
France’s inflation reprieve may also prove short-lived as the government adjusts energy price caps in January and February to allow for a 15% increase in household bills. And even as energy inflation eased in December, manufactured goods prices rose at a higher pace than in November.
“Inflation should remain high until spring 2023, especially due to the reduction in the price shield at the start of the year,” Asteres economist Sylvain Bersinger wrote. “However, favorable trends in the energy price show there’s light at the end of the tunnel.”
French statistics agency Insee has said it expects headline inflation to increase in the first two months of the year, with an easing from March largely attributable to base comparisons.
Still, Finance Minister Bruno Le Maire, whose government is about to face controversy over planned reforms of the country’s pension system, is taking an easing in inflation as a win.
“During the course of 2023, I confirm my forecast, we should see inflation start to slow,” he told France Inter radio on Wednesday.
The rising cost of living is already dragging on economic output in France as consumer spending power declines. A separate survey Wednesday showed household confidence fell one point to 82 in December with consumers becoming less bullish about their financial situation. Inflation expectations also increased.
–With assistance from Joel Rinneby, Ainhoa Goyeneche and Libby Cherry.
(Updates with market reaction in fifth paragraph, economist comment in eighth)
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