French Inflation Resumes Slowdown Two Days Before Elections

(Bloomberg) -- French inflation slowed a little — reinforcing the European Central Bank’s decision to begin cutting record-high interest rates and offering an economic bright spot for President Emmanuel Macron two days before elections.

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Consumer prices in the euro area’s second-largest economy rose 2.5% from a year ago in June after advancing 2.6% the previous month, the Insee statistics agency said Friday. The reading matched the median estimate of economists in a Bloomberg survey.

A separate release showed inflation in retreat in Spain as well. Price gains moderated to 3.5% from 3.8%, also in line with expectations, though a gauge of underlying pressures held steady. In Italy, inflation ticked up but remained below 1%.

While the ECB lowered borrowing costs this month, most officials are reluctant to plot a path for monetary policy amid elevated uncertainty over everything from wage growth to geopolitics.

Markets are betting on one or two more cuts in 2024 — a view some ECB Governing Council members endorse. As well as Friday’s data, investors will be able to assess inflation numbers from Germany on Monday and the euro zone as a whole on Tuesday.

Bloomberg Economics’ Nowcast for the bloc points to a reading of 2.4% — down from 2.6% in May.

A survey from the ECB, also released Friday, offered hope that the pullback in prices can persist, with inflation expectations among euro-zone consumers declining over both the next 12 months and the next three years.

Bond yields started to head higher through the morning, with France underperforming before the weekend’s first round of voting in parliamentary elections. The 10-year yield spread over Germany widened a further three basis points to 85 basis points — the highest since 2012. The equivalent Italian rate also edged higher to the widest since February.

In France, inflation slowed as food and energy price-increases decelerated. According to a national price index, inflation eased even more than in the harmonized reading, reaching 2.1% in June.

The cost of living is a major issue in the snap elections that start Sunday. Surveys show spending power and prices are top concerns, and the main parties have proposed steps including lower sales taxes and a higher minimum wage.

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The vote is clouding the near-term outlook, with worries over policy shifts prompting investors to dump French assets and drive up borrowing costs. Consumer confidence is worsening, too, according to a monthly survey released this week, while there’s been a notable increase in inflation expectations and a decrease in the outlook for living standards.

Still, in better news for the current government, a separate release from Insee showed consumer spending rose 1.5% in May as households spent more on food and energy. Economists had forecast a 0.2% month-on-month increase.

--With assistance from Ainhoa Goyeneche, Joel Rinneby, Mark Schroers, Alice Gledhill, Andrej Sokol (Economist) and Giovanni Salzano.

(Updates markets in eighth paragraph.)

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