Lower energy prices helped lower inflation in France as European equities rose on rising expectations of an inflation spike in the region.
French inflation fell to 6.7% in the year to December, as economists expected a slight rise from the 7.1% figure recorded in November.
European equities benefited from their early 2023 rally after the release of the inflation report. The region-wide Stoxx 600 rose 0.9%, leaving it up almost 3% this week. Stocks in the region are on course to post one of their five best performances for the first five trading days of every year since 1987, according to Financial Times calculations based on data from Refinitiv.
The harmonized price measurement — produced by Insee, the French statistics agency — follows similar shifts in Spain and Germany and heightened expectations of a sharp fall in headline inflation in the eurozone after surging to double-digit levels last year.
Stock markets in France, Germany and Spain all rose by a similar margin in the first trading days of the year on better-than-expected data.
A bigger fall than expected inflation in the first months of 2023 would allow the European Central Bank, which aggressively raised borrowing costs in the course of 2022 to counter record prices, to stop raising rates before the summer.
Eurozone inflation is expected to fall to single digits for the first time in three months due to falling energy prices paid by households and businesses across the region – a consequence of measures taken by governments in the area to control the cost of gas and Warmer than usual weather in recent months.
December price data for the block is released on Friday. Economists polled by Bloomberg predict a drop to 9.5% – the lowest level since August and well below October’s peak of 10.6%.
Claus Vistesen, an economist at Pantheon Macroeconomics, said this week’s price data indicated “a significant downside surprise” in Friday’s eurozone inflation figures, predicting a 9% drop in the rate. global for the block.
Government borrowing costs fell slightly, with the yield on the French 10-year sovereign bond falling 0.1 percentage point this week to 2.82%, while the German equivalent fell 0.07 percentage point to 2.3%.
However, data released this week also indicate that while lower energy prices have reduced headline inflation, underlying price pressures for other goods and services have remained largely unchanged or have even continued to rise. to augment. Core inflation – which excludes changes in energy and food prices – rose in Spain, and Germany recorded higher services inflation, although in France the pace of growth service prices has also slowed.
Vistesen said the lack of a decline in underlying pressures would “keep the ECB on high alert at the start of the year.”
Economists still expect the bank to hike its deposit rate by half a percentage point in February and March, taking it to 3%. The euro traded up 0.7% against the dollar on Wednesday at $1.061, despite weaker-than-expected French inflation figures.
Headline inflation in the region is expected to fall sharply in the spring as the impact of last year’s energy price spike fades from the annual index.
Carsten Brzeski, head of macro research at ING, said price pressures “could – temporarily – fall to 2% before the end of the year” – a level in line with the ECB’s target.
French Finance Minister Bruno Le Maire told France Inter radio that inflation would come down this year.
Earlier and more aggressive government energy subsidies helped buffer the country from the double-digit spike in consumer prices that swept through much of the rest of Europe.
Analysts polled by Reuters had expected a 7.3% increase in the French number.
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