French Inflation Unexpectedly Slows, Easing Pressure on ECB

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(Bloomberg) — French inflation unexpectedly slowed in December, adding to signs of easing price pressure throughout the euro area. 

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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.

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Inflation in Germany eased for the second consecutive month 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.

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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. 

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. 

According to forecasts from statistics agency Insee last month, headline inflation will increase in the first two months of 2023 and the easing from March will be largely attributable to base comparisons. 

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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 costs 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 James Regan, Joel Rinneby and Ainhoa Goyeneche.

(Updates with Le Maire in eighth paragraph)