Inflation in France and Germany Unexpectedly Slowed

Inflation in France unexpectedly slowed in December, further confirming the easing of price pressures across the euro area.

With slower inflation in energy and services, consumer prices rose by 6.7 percent compared to the previous year after record increases of 7.1 percent in October and November. Economists surveyed by Bloomberg had expected an acceleration to 7.3 percent in the last month of 2022, partly because the government began to gradually phase out fuel discounts.

Inflation in Germany also slowed more than expected last month, according to figures released on Tuesday, and data on Friday for the entire euro area is expected to show a further slowdown to 9.5 percent from the previous 10.1 percent.

Signals that inflation may have peaked represent a significant relief for policymakers at the European Central Bank. The Frankfurt-based institution already opted for a smaller rate increase of half a point at its last meeting after data showed inflation slowed in November, Bloomberg reported.

Euro area government bonds advanced following the latest French data, while traders reduced bets on the peak rate in the ECB’s tightening cycle, pricing it at 146 basis points of additional tightening by mid-2023, down from about 152 basis points at Tuesday’s close.

A warmer start to winter than expected could also alleviate some cost pressures as energy demand proves to be lower than anticipated. However, Bundesbank President Joachim Nagel warned earlier this week that further monetary policy measures are still needed to stop and reverse the trend of rising inflation expectations, with markets expecting increases of 50 basis points at the next two meetings.

Short Breather

The inflation reprieve in France could also prove short-lived as the government adjusts the upper limits on energy prices in January and February to allow for a 15 percent increase in household bills. Even as energy inflation eased in December, industrial product prices rose at a faster pace than in November.

– Inflation is expected to remain high until spring 2023, particularly due to the reduction of the price shield at the beginning of the year. However, favorable trends in energy prices indicate that there is light at the end of the tunnel, wrote Asteras economist Sylvain Bersinger.

The French statistics agency Insee announced that it expects an increase in overall inflation in the first two months of this year, with easing from March largely attributable to base comparisons.

Nevertheless, Finance Minister Bruno Le Maire, whose government will soon face controversies over planned pension system reforms in the country, takes the easing of inflation as a kind of victory.

– Throughout 2023, I confirm my forecast, we should see inflation begin to slow down, he said on Wednesday to France Inter radio.

Rising living costs are already pulling down economic performance in France as purchasing power declines. A separate survey on Wednesday showed that household confidence fell by one point to 82 in December, with consumers becoming increasingly less optimistic about their financial situation. Inflation expectations have also increased, Bloomberg reported.