U.S. News

French Inflation Muted; Central Bank Survey Shows Optimism


Lower food prices helped to subdue French inflation in February, offsetting higher charges for services and manufactured goods, while the Bank of France raised its growth forecast for the first quarter.

Consumer prices in the euro zone's second-largest economy rose by 0.2% in February from a month earlier and by 1.2% year-on-year, Wednesday's data from national statistics office INSEE showed.

That was below Reuters' consensus forecasts for rises of 0.4% monthly and 1.4% annually, and well below the euro zone's annual inflation rate for February of 1.8%.

The Bank of France also issued its monthly business activity survey on Wednesday, showing optimism as France heads for presidential elections in April and May.

The bank raised its growth forecast for the first quarter of 2007 to 0.8% from a previous forecast of 0.7%, saying firms' capacity utilization rates were well above long term average levels and orders had firmed.

Combined with the low inflation figure and coming after gloomy industrial output and trade data last week, the relatively buoyant outlook came as a surprise to some economists who have been cautious about prospects for the French economy.

"The Bank of France figure is fairly high for us because we expected a decent figure around 0.5 or 0.6," said Frederic Pretet, an economist at Societe Generale in Paris.

Inflation Risks Ease

Meanwhile Italy confirmed consumer prices rose 0.1% month-on-month in February and 2.1% year on year, using the common EU measure.

"Before the release we saw some clear upside risks for inflation for the euro zone, but today no longer," said Tullia Bucco, an economist at Unicredito in Milan.

Overall the data was positive for France's centre-right government but it further complicates the picture for the European Central Bank, which raised rates to 3.75% last week, as it contemplates a further hike this year.

"Of course this is good news for French consumers, who gain in purchasing power," said Nicolas Bouzou, an economist at Asteres in Paris, referring to the moderate inflation rate.

"But at the same time we know inflation which is too weak creates problems with margins and investment in certain sectors. Let's hope the ECB takes this into account," he said.

Food prices declined 0.4% on the month with fresh produce prices down 2.4%. By contrast, services prices were up 0.4%, linked partly to seasonal rises connected with the February school holiday period.

Manufactured goods rose 0.2%, lifted by higher prices for clothes and shoes at the end of the winter sales period. Energy prices also rose 0.2%.

"We expected food prices to be relatively weak in February," said Societe Generale's Pretet.

"We had already seen in the German inflation figures that food was an element that was going to hold inflation over the month, but -0.4 is a surprise," he said.

Excluding tobacco, prices rose 0.2% month-on-month and 1.1% year-on-year, the office said.