France’s Muted Price Pickup Offers ECB Mixed Signals
(Bloomberg) -- French inflation accelerated less than expected in July, offering mixed evidence for European Central Bank officials amid stronger pressures in Germany.
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Consumer prices in the euro area’s second-largest economy rose 2.6% in July from a year earlier, after a 2.5% increase in June, statistics agency Insee said. Economists surveyed by Bloomberg had forecast a 2.8% reading.
The number for the entire currency bloc later on Wednesday is expected by economists to show steady inflation of 2.5%. A Bloomberg Economics Nowcast — incorporating the French outcome and surprise accelerations in Germany and the Netherlands — sees an uptick to 2.6%.
Such numbers are crucial in determining the ECB’s next move after it paused policy loosening this month to await more evidence on the strength of price pressures. While investors anticipate a cut in borrowing costs in September, officials have stressed their decision will hinge on a mass of indicators still to come.
Euro-area bonds extended small gains after the data. The German 10-year yields was down three basis points to 2.31%, the lowest since March. French peers lagged the move slightly, widening the 10-year yield premium by one basis point to 72 basis points.
Growth numbers on Tuesday that showed uneven expansion across the region won’t have made that judgment any easier. France and Spain beat estimates, Italy slowed slightly, while German gross domestic product unexpectedly fell.
In France in July, inflation was supported by an acceleration in energy costs, while food prices eased. In services, which ECB policymakers are watching as a measure of momentum in core prices, inflation slowed to 2.5% from 2.9% — the slowest in more than two years.
What Bloomberg Economics Says...
“A rise in headline inflation was widely expected, as the French regulator introduced higher gas tariffs as of July 1. The release suggests that the general downward trend in inflation will continue for the rest of the year. The road ahead may be bumpy though, with the Olympic Games possibly adding temporary price increases.”
—Simona Delle Chiaie, senior economist. For full React, click here
Bank of France Governor Francois Villeroy de Galhau has said that the ECB is paying particularly close attention to signals from the services sector. Overall, he has been upbeat on the central bank’s efforts, saying disinflation is continuing as expected and that price growth will continue to slow with certainty.
The country’s struggle with inflation over the last two years was a top concern for voters in legislative elections that have plunged France into an uncertain political future. With a hung parliament, President Emmanuel Macron has delayed picking a new prime minister until later this summer.
--With assistance from Barbara Sladkowska, James Hirai, Andrej Sokol (Economist) and Simon Lee.
(Updates with Nowcast in third paragraph)
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