French Inflation Hits Another Record, Feeding Rate Debate

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French inflation accelerated to another all-time high, heaping pressure on the European Central Bank to lift interest rates more aggressively after strong readings in Germany and Spain.

Consumer prices in the euro area’s second-largest economy jumped 5.8% from a year ago in May — matching the median estimate of economists surveyed by Bloomberg — as surging energy and food costs continued to filter through to other goods and services.

With data this week from Germany and Spain already exceeding expectations, the French figures suggest an overshoot when the the euro zone reports inflation numbers later Tuesday.

Meanwhile, fears of stagflation will be fueled by a separate report out of Paris showing the French economy contracted 0.2% in the first quarter from the previous three months. That’s a downward revision from an initial reading of no growth.

The slew of economic statistics comes just over a week before ECB officials meet to decide on when to conclude crisis-era measures including unprecedented asset purchases and eight years of negative interest rates.

They’re set to announce the end of net bond-buying and confirm plans to raise borrowing costs in July for the first time in more than a decade. While Chief Economist Philip Lane said Monday that quarter-point hikes that month and again in September is a “benchmark pace,” some of his colleagues want to follow the Federal Reserve by considering a steeper half-point move.

“The latest inflation figures for May, in France and in the other countries, confirm the rise that we expected, and the necessity of a gradual but resolute monetary normalization,” ECB Governing Council member Francois Villeroy de Galhau, who heads France’s central bank, said in a speech in Paris.

The fastest inflation in the euro’s history is also creating difficulties for governments — particularly in France where President Emmanuel Macron faces parliamentary elections next month. He’s already committed about 25 billion euros ($27 billion) to mitigating the fallout from inflation, but needs to budget about 2 billion euros more as power costs have risen further.

“We are totally determined to fight against inflation and protect the poorest households against the rise in gas and electricity prices,” Finance Minister Bruno Le Maire said Monday.

Those measures have shaved about 2 percentage points off France’s inflation rate, statistics agency Insee estimates. But that may not be enough to stop price fears weighing on consumer sentiment that’s already fallen beneath lows set during the pandemic and the Yellow Vest protests over the cost of living.

A separate Insee report Tuesday showed consumer spending unexpectedly shrank by 0.4% from the previous month in April as households cut back on purchases of food and manufactured goods. Economists polled by Bloomberg had predicted a 0.5% increase.

(Updates with Villeroy in seventh paragraph)