French inflation surprised on the downside

Chris Scicluna
Emily Nicol

Flash French inflation surprises to the downside as energy inflation drops to a 15-month low
Coming on the back of downward surprises in German and Spanish inflation in December, today’s French estimates were similarly better than expected. In particular, consumer prices fell 0.1%M/M, to leave the EU-harmonised rate of inflation down 0.4ppt to 6.7%Y/Y, a three-month low having been expected to rise by 0.2ppt. The national measure of inflation also eased 0.4ppt to 5.9%Y/Y. Like in Germany and Spain, the downwards shift in France reflected a drop in energy prices (-3.6%M/M) to leave the annual rate down 3.3ppts to 15.1%Y/Y, the lowest since September 2021. Services inflation also edged slightly lower in December, by 0.1ppt to 2.9%Y/Y, offsetting a further modest uptick in manufacturing goods inflation, by 0.2ppt to 4.6%Y/Y, a new series high.

Overall, today’s release confirms that the euro area inflation estimate (due Friday) will fall sharply in December. Indeed, taken together with the downtrend seen across other euro area member states (including Portugal and Belgium) and even assuming no improvement in Italy (that is currently the Bloomberg survey consensus), we would expect to see headline euro area inflation moderate by at least 0.8ppt to 9.3%Y/Y. But risks to this forecast are skewed to the downside. Core inflation, however, seems likely to have remained sticky in December, with risks of a possible uptick above 5.0%Y/Y.

German import prices fall by record amount in November
Following yesterday’s downside surprise in German consumer price inflation in December, this morning’s German import price data also surprised significantly on the downside. Indeed, German import prices fell for a third successive month in November and by a record 4.5%M/M, almost three times the expected drop. Given base effects, the annual rate of import price inflation fell 9ppts to 14.5%Y/Y, still very high but more than 18ppts below the peak in August. Perhaps unsurprisingly, lower prices of imported energy (down more than 16%M/M) accounted for much of the drop in prices in November. However, even excluding such items, import prices fell for the first time since June, dropping 0.7%M/M after being unchanged in October, with prices of consumer, capital and basic goods all falling in November to add to evidence of an easing of cost pressures in the manufacturing sector. Indeed, excluding energy, import price inflation slowed almost 2ppts to 9.7%Y/Y, having been up more than 15%Y/Y in June. Of course, the ECB will worry that inflation of services might remain under upwards pressure due to higher labour costs even as goods inflation shifts into reverse.

French consumer confidence unexpectedly slips back in December; final euro area services PMIs also due
Contrasting with the improvement recorded in the Commission’s flash euro area consumer confidence index, the French INSEE consumer confidence survey reported a modest drop in the headline sentiment index in December. Indeed, the indicator fell 1pt to 82, above the lows seen during the summer (79) but nevertheless still well below levels recorded at the start of the year (99). With households more downbeat about their past and expected financial situations, the share of households considering it a good time to make major purchases fell again in December, to the lowest since the start of the pandemic. Meanwhile, the final euro area services and composite PMIs for December will also be published shortly. The flash survey saw the euro area composite output PMI rise 1pt to a four-month high of 48.8, suggesting that the current downturn in economic activity might not be as severe as initially feared. This morning will also bring the German new car sales and production figures for December.

UK shop price inflation slows slightly in December as non-food prices fail to rise
According to the BRC survey, UK shop price inflation slowed slightly in December, dropping 0.1ppt from November’s high to 7.3%Y/Y. That was despite further pressure in food prices, which rose 1.1%M/M to be up 13.3%Y/Y. In contrast, non-food prices failed to rise for the first time since January, being unchanged in December so that the respective annual rate slowed 0.4ppt to 4.8%Y/Y. The BRC survey provides further evidence that UK CPI inflation peaked at 11.1%Y/Y in October. Separately, the Bank of England’s monthly lending figures for November are likely to report still subdued demand for consumer credit, while mortgage approvals are expected to have slowed again amid higher borrowing costs.

Japan’s manufacturing PMIs point to declining output and lacklustre demand in December
Despite a modest upwards revision from the flash release, today’s final Japanese manufacturing PMIs offered a pretty bleak assessment for the sector heading into the end of last year, with output continuing to decline and demand remaining lacklustre. Admittedly, the output component rose in December by 0.9pt, although at 46.6 it remained firmly in contractionary territory for the sixth consecutive month and at the second-fastest pace since September 2020. And while the new orders PMI also rose in December, it too was the second lowest reading since August 2020. Against this backdrop, manufacturers cut their purchases of inputs by the most in more than two years. But contrasting with Europe, there was little improvement in supplier delivery times last month. And the moderation in cost pressures were more minimal too, with the input cost PMI down just 0.6pt to 68.9, while the output price PMI fell 0.4pt to 59.2.

US manufacturing ISM and FOMC minutes in focus
In the US, today’s release of the December manufacturing ISM survey is likely to suggest that the sector contracted at a faster pace at the end of last year, with new demand lacking too. And so, having fallen sharply in November, the price indices will also likely point to easing inflationary pressures in the sector. Attention will also be on the FOMC minutes from the 14 December policy announcement, where the Committee slowed the pace of rate hikes to 50bps to take the FFR target range to 4.25-4.50%, but also revised significantly higher its expectations for the terminal rate this cycle, with the dot-plot median figure for end-2023 at 5.125%. Indeed, the minutes will likely reiterate the hawkish message from Chair Powell’s post-meeting press conference suggesting that, based on its current outlook, the Fed does not intend to pivot to easier policy this year.

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