Falling French inflation feeds hopes of halt to ECB interest rate rises

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French inflation slowed to its lowest annual rate for 16 months, as falling energy costs reduced consumer price growth in the eurozone’s second-largest economy to 5 per cent in June from 5.3 per cent the previous month.

The figure released by the French national statistics institute was in line with economists’ forecasts in a Reuters poll, offering some relief ahead of the publication of price data for the wider eurozone on Monday that is expected to show an overall decline.

In a further positive sign for the single currency bloc, the French economy rebounded in the three months to June, growing at a faster than expected 0.5 per cent from the previous quarter as rising exports more than offset a fall in household spending. 

Inflation also looked likely to have fallen in Germany, after Europe’s largest economy stagnated in the second quarter. The flatlining of German gross domestic product was an improvement from declines in the previous two quarters, but was below the 0.1 per cent growth forecast by economists in a Reuters poll.

Regional German data pointed to a cooling of overall consumer price growth in the country to 6.6 per cent in July, down from 6.8 per cent in June, according to Goldman Sachs. Full inflation figures for Germany are due later on Friday.

The data prompted investors to pare back their bets on further rate rises by the European Central Bank. Germany’s rate-sensitive two-year bond yield dipped on Friday and the euro fell 0.2 per cent against the dollar.

However, inflation in Spain accelerated in the period, rising more than expected to 2.1 per cent, up from 1.6 per cent in the previous quarter.

Policymakers at the ECB will be watching price growth across the single currency bloc after leaving the door open to a pause in a year-long period of interest rate rises in September, following a quarter-percentage point increase on Thursday.

While eurozone headline inflation is expected to keep falling, the ECB is concerned about tight job markets and rising wages, particularly in the labour-intensive services sector. Its decision on whether to raise rates again at its next meeting in September could hinge on whether consumer price growth keeps slowing over the next two months.

“The drivers of inflation are changing,” ECB president Christine Lagarde said on Thursday. “External sources of inflation are easing. By contrast, domestic price pressures, including from rising wages and still robust profit margins, are becoming an increasingly important driver of inflation.”

Energy prices in France fell 3.8 per cent in the year to July. Coupled with a slowdown in food inflation and in manufactured goods inflation, this helped to offset a slight increase in services inflation. Compared with the previous month, French consumer prices were flat.

The acceleration of French quarterly growth from 0.2 per cent in the first quarter was above economists’ expectations and indicates the eurozone economy could start to emerge from the doldrums when gross domestic product figures for the 20-country bloc are released on Monday.

Insee, the French statistics agency, said business investment was up 0.7 per cent in the second quarter while household spending was down 0.4 per cent. There was a boost from the country’s balance of trade growth as exports rose 2.6 per cent and imports were up only 0.4 per cent.

However, economists said the continued downturn in French domestic demand could still point to weakness in the wider eurozone economy. Claus Vistesen, an economist at consultants Pantheon Macroeconomics, said the “main impetus” to French growth was the “delivery of a cruise ship”, which boosted exports of transport equipment.

French goods consumption fell 0.7 per cent in the second quarter, despite a rebound in May and June, Insee said. 

The Spanish economy grew 0.4 per cent in the three months to June from the previous quarter, a slowdown from its 0.5 per cent expansion earlier in the year that matched economists’ expectations. 

The country, which is gripped by political deadlock after an inconclusive election left both main parties struggling to form a government, was boosted by a rebound in domestic demand, which expanded 1.9 per cent, offsetting a negative contribution from trade after exports fell 4.1 per cent.