(Bloomberg) — French inflation accelerated in August, adding to evidence of persisting pressures in the region just as European Central Bank officials prepare to decide whether to keep raising interest rates.
Consumer prices in the euro area’s second-biggest economy rose 5.7% from a year earlier, statistics agency Insee said on Thursday — much faster than the 5.4% median forecast in a Bloomberg survey of economists. The overshoot was due to energy costs.
Together with Wednesday’s reports showing inflation stayed above 6% in Germany and quickened to 2.4% in Spain, policymakers now have an emerging picture of unyielding consumer-price strength in three of the region’s four largest units.
ECB Governing Council members have framed the inflation data as critical to the upcoming Sept. 14 decision on whether to lift rates again for a 10th consecutive meeting, or to pause their historic tightening campaign.
What Bloomberg Economics Says…
“France’s inflation jump was entirely driven by a rise in energy contributions, and masked a further easing in underlying price pressures. We expect that core inflation (not published with the preliminary reading) fell to 4.0% in August from 4.3% in July.”
—Maeva Cousin, senior economist. For full react, click here
Most important will be numbers later on Thursday for the overall euro region, which are anticipated by economists to show underlying price growth, stripping out volatile elements such as energy, still stuck above 5%, more than twice the pace targeted by policymakers.
ECB Executive Board member Isabel Schnabel on Thursday said that “underlying price pressures remain stubbornly high.”
Still, she acknowledged that economic prospects for the euro area are more dire than officials predicted in June and that she couldn’t say “where the peak rate is going to be, or for how long rates will have to be held at restrictive levels.”
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Those comments saw money markets to pare monetary-policy tightening wagers. They now favor policymakers to keep the deposit rate on hold at 3.75% when they meet next month. That stands in contrast to earlier when bets were firmed on a quarter-point increase after French inflation accelerated.
The yield on German 2-year debt which is among the most sensitive to changes in policy fell 4 basis points to hover just above 3%, a level that has held firm so far this week.
Concurrently with the euro-area data, Italy will also release its inflation report. That’s expected to have slowed to 5.6%, according to the median estimate of economists. Earlier on Thursday, Dutch statisticians revealed that price growth in the Netherlands was 3.4%.
The ECB is weighing whether inflation is still too strong to risk a halt to tightening, or whether the economy is already weak enough to brake price growth on its own.
The decision in exactly two weeks’ time is currently looking to be a cliffhanger. Austria’s Robert Holzmann, one of the most hawkish officials, has already signaled he may support a hike “if there aren’t any big surprises.”
Finnish official Tuomas Valimaki meanwhile insisted to reporters this week that the outcome is “totally open.” ECB President Christine Lagarde has avoided signaling her preference, beyond commenting last week that remains undefeated.
Officials favoring no change in rates are likely to emphasize the gloom overshadowing the economy.
France is experiencing much the same weakness as its neighbors. While data Thursday confirmed it expanded 0.5% in the second quarter, economists predict it will grow just 0.1% in the three months through September.
Business sentiment indexes out last week showed worse-than-expected contractions in private-sector activity, with firms signaling weakening demand and reporting drops in order backlogs. Output in services fell at the quickest pace in 2 1/2 years, while manufacturing declined for a seventh month.
—With assistance from Barbara Sladkowska, Joel Rinneby, Alexander Weber and James Hirai.
(Updates with Bloomberg Economics after fourth paragraph)