PARIS: French inflation eased below 3% for the first time in 2½ years and Italy reported a lower-than-expected reading, confirming a trend that has tipped the European Central Bank (ECB) toward cutting interest rates.
Consumer prices in France, the euro zone’s second-largest economy, rose 2.4% from a year earlier in March after a 3.2% gain the previous month, according to statistics agency Insee.
The slowdown was sharper than the 2.8% forecast of economists surveyed by Bloomberg.
In Italy, the bloc’s third-largest economy, inflation had already fallen below 2% in October. Data last Friday showed an acceleration to 1.3% from 0.8% in February, but that was less than the 1.5% expected.
Readings next week are expected to show a slight slowdown in the rate for the 20-nation currency bloc to 2.5%, while Bloomberg Economics’ nowcast model suggests it could dip to as low as 2.3%, accounting for the latest data.
With inflation nearing the European Central Bank’s (ECB) 2% target, most policymakers have backed President Christine Lagarde’s signal that a first interest-rate cut will come in June.
Economists and markets share that expectation, with investors almost fully pricing a reduction in the deposit rate to 3.75% from 4% at the institution’s June 6 meeting.
Bloomberg economist Eleonora Mavroeidi said: “French headline inflation eased in March to its lowest level since August 2021, driven by lower contributions from food, energy, manufactured goods and services. Some of those downward pressures could reverse in April and we expect inflation to fall at a slower pace in the coming months.”
Bank of France governor Francois Villeroy de Galhau has said a cut at the ECB’s next meeting on April 11 is also a possibility and warned that waiting too late to move risks inflicting undue damage on the economy.
“Risks to inflation are now balanced, but risks to growth are on the downside,” Villeroy said in a speech last Thursday. “The time has come to take out insurance against this second risk by beginning rate cuts.” Still, some policymakers remain cautious on wage increases that could continue to fuel price pressures, particularly in the services sector where labour makes up a large share of costs.
France’s inflation report showed services inflation slowed to 3% in March from 3.2% in February. Manufactured goods also saw a cooling of price increases to 0.1% from 0.4%.For the French government, recent disinflation is a double-edged sword.
Slower price increases have undermined tax receipts, contributing to a widening of the budget deficit, but officials are also counting on easing cost pressures to help drive the economy out of stagnation.
“Inflation is a big concern for all citizens, for their spending power and food purchases,” French Finance Minister Bruno Le Maire told reporters during a visit to a Renault SA factory in northern France last Friday.
“The latest results published today show we have won the battle against inflation.”
A separate report from Insee showed consumer spending in February failed to grow from the previous month, when it declined 0.6%. Economists had expected a 0.2% increase. — Bloomberg
