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Falling French inflation sparks hopes of end to price hikes in Europe

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Lower energy prices helped reduce inflation in France, with European equities rising on rising expectations that inflation has peaked across the region.

French inflation fell to 6.7 percent in the year to December, against economists’ expectations for a slight rise from 7.1 percent in November.

European equities surged on their early 2023 rally following the release of the inflation report. The Stoxx 600 across the region was up 0.9%, up nearly 3% this week. Equities in the region are on track to post one of their top five first-five trading days of any year since 1987, according to Financial Times calculations based on Refinitiv data.

The harmonized price measure – produced by Insee, France’s statistics agency – follows similar slides in Spain and Germany and has raised expectations that inflation in the euro zone will fall sharply after last year’s rise to double-digit levels. .

Stocks in France, Germany and Spain rose by a similar margin in the first trading days of the year on better-than-expected data.

A sharper-than-expected drop in inflation during the first few months of 2023 would allow the European Central Bank, which has aggressively raised borrowing costs throughout 2022 to contain record prices, to stop raising rates before the summer.

Eurozone inflation is set to drop into single digits for the first time in three months due to the drop in energy prices paid by households and businesses in the region – a consequence of measures by governments in the region to keep the cost of gas under control and climate hotter than normal in recent months.

December price data for the block is published on Friday. Economists polled by Bloomberg forecast a drop to 9.5 percent – the lowest level since August and far below the October peak of 10.6 percent.

Claus Vistesen, economist at Pantheon Macroeconomics, said this week’s price data pointed to “a significant downside surprise” in Friday’s euro zone inflation figures, forecasting a drop of as much as 9% in the bloc’s benchmark rate.

Government borrowing costs fell slightly, with the yield on France’s 10-year sovereign bonds falling 0.1 percentage points this week to 2.82%, while the German equivalent fell 0.07 percentage points to 2.3. %.

However, data released this week also indicate that while falling energy prices have reduced headline inflation, underlying pressures on prices for other goods and services have remained broadly unchanged or even continued to increase. 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 in services prices also slowed.

Vistesen said the lack of a drop in underlying pressures “would keep the ECB on its toes at the start of the year”.

Economists still expect the bank to raise its deposit rate by half a percentage point in February and March, taking it to 3%. The euro traded 0.7 percent higher against the dollar at $1.061 on Wednesday, despite French inflation figures being cooler than expected.

Headline inflation in the region is expected to decline sharply in the spring, as the impact of last year’s rise in energy prices falls outside the annual index.

Carsten Brzeski, head of macro research at ING, said price pressures “may – temporarily – drop 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 will fall throughout this year.

Earlier, more aggressive government energy subsidies helped shield the country from the double-digit rise in consumer prices that swept much of the rest of Europe.

Analysts polled by Reuters had expected a 7.3 percent rise in the French figure.