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Economy in Brief

French Consumer Prices Show Some Pressure
by Robert Brusca  April 12, 2012

The ECB's monthly report noted that inflation was expected to hover above its limit of 2% in 2012 with 'upside risks prevailing.' Still the ECB regards this as broadly consistent with price stability. A moderate recovery with downside risks is the other half of the equation. In the wake of that report for the whole of the Zone, we have inflation data from France for March. The headline for the French HICP was up by 0.5% a bit stronger than for the French domestic inflation measure. In the domestic report we also get a view of inflation less energy which is up by 0.4%. That metric is missing from the HICP framework at this time.

The chart shows that French ex energy inflation trends have risen sharply and do not really show any signs of abating. Still, the Yr/Yr pace is not an issue with the gain at 1.9%.. The German ex-energy measure is not yet available but as of February it was up at a 1.0% pace. So French inflation may be causing France to lose competitiveness Vs Germany. The two measure of French headline inflation (HICP and domestic) are a bit ahead of the same two German rates which we do have in hand for March.

With the competiveness losses in the weaker EMU countries quite clear, these sorts of comparisons are important to keep in mind. Also France has elections in gear and the Socialist candidate wants to drastically raise the top tax rate and lower the retirement age...possibly sending France into another ice-age It is not clear how France, hit with the shock of such a higher top-tax rate, would respond and despite such a hike lowering the retirement age to 60 which is another plank in that platform would certainly put France's fiscal trend on an opposite track to just about every other nation in Europe. And this would be a structural trend not a cyclical bump intended to enhance growth and then be withdrawn.

Still the trends for French inflation are not so bad. If we put aside the other worries France's situation is manageable. Across the eleven main price categories in the domestic inflation measure France sees inflation accelerating in three months compared to six months in only 27% of the categories; that is with the rate of headline inflation at 2.9% which is clearly too strong. But with ex-energy inflation up at just a 1.6% pace, which is modest the three-month situation is not out of control. Over six months French inflation is accelerating in 63% of the categories with headline inflation at a 3% pace but again ex-energy inflation is tempered at 2%. The 12-month inflation figures show the core at a mild 1.9% pace with the headline at 2.3% and diffusion showing that inflation is accelerating compared to one year ago ( when its pace was 2.1%) in 54% of the categories. All in all that is quite benign.

While those metrics may not say that the inflation situation is in tip top shape in France they do show a situation with pressure largely contained. The all-important but not targeted ex-energy rate shows that inflation is not being allowed to spread and the impact of on inflation on the headline is something that cannot be fought off in the short run. And energy prices have been stimulated recently across the global stage.

March has been a relatively 'bad' month for French inflation, yet the trend has not been blown out of proportion by the month's reading. Europe, at the same, is undergoing stress again with Spanish and Portuguese auctions showing strains and Italy suffering some knock-on effects from those strains. In this environment the ECB is content to let inflation have a mild continuing overshoot.

The big issues for France will concern what happens at the polls since if Sarkozy loses there is the possibility of putting French fiscal policy on a track that is out of sync with the rest of Europe. Sarkozy may not be very popular, but a shift to more fiscal expansion at this time could unravel a lot of the success France has had in being able to shadow Germany and its low inflation performance in the Zone. Events in the South of the Zone are revealing day by day why France will not want to give up its ability to continue to track German price developments. In the Zone you fall behind Germany at your own peril.

France HICP and CPI Details
  Mo/Mo % SAAR % Yr/Yr
  Mar'12 Feb'12 Jan'12 3Mo 6Mo 12Mo Yr Ago
HICP Total 0.5% 0.1% 0.1% 2.7% 3.1% 2.6% 2.1%
All 0.4% 0.1% 0.2% 2.9% 3.0% 2.3% 2.0%
CPIxE 0.4% 0.0% 0.0% 1.6% 2.0% 1.9% 0.9%
Food 0.5% 0.7% -0.6% 2.1% 2.5% 3.6% 0.8%
Alcohol 0.5% 0.5% 0.5% 5.9% 6.3% 5.0% 3.0%
Clothing & Shoes 5.9% -1.2% -2.1% 9.9% 8.6% 5.4% 0.9%
Rent &Util 0.1% 0.6% 0.6% 5.2% 4.3% 3.5% 4.9%
Health Care -0.3% -0.2% 0.0% -1.6% -1.1% -0.7% -0.3%
Transport 0.4% 0.0% 0.4% 3.4% 3.8% 3.0% 4.7%
Communication -0.7% -1.9% -1.0% -13.1% -7.3% -7.0% -1.3%
Rec &Culture 0.1% 0.2% -0.2% 0.1% -0.5% -0.2% -1.0%
Education 0.2% 0.3% -0.4% 0.1% 1.2% 1.9% 1.6%
Restaurant & Hotel 0.7% 0.1% 0.7% 6.1% 4.4% 2.8% 2.1%
Other 0.0% 0.3% 0.6% 3.7% 4.3% 2.8% 2.8%
Diffusion       27.3% 63.6% 54.5%  
Type: Diffusion: Compared to 6Mo 12Mo Yr Ago --
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