Prices in France are falling, but will Eurozone inflation drop?

If “pandemic” was the buzzword of 2020 and 2021, then “inflation” may have taken the top spot in 2022. And if you were hoping that the topic would be confined to the annals of history as we turn the page on a new year, then I hate to disappoint you, but there will likely be significantly more digital ink spilt this year on the cost of living crisis.

French inflation falls to 6.7%

However, the year has begun on a positive note, as inflation in France for December was revealed as 6.7%, a significant drop from the 7.1% figure of the previous month. It also smashes analyst expectations, as a small rise on the previous 7.1% had been anticipated.

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European stocks jumped on the news, as hope was sparked across the region that this could be a signal of more positive news to come, compared to what has been priced in by the market. The Stoxx 600, which is a stock index for the European region, surged 1% on the news and is now up almost 3% on the year thus far.

The index had plummeted last year, shedding 15% of its value.

Will ECB curtail interest rate rises?

The market jumped on optimism that this could signal softer inflation to come across the eurozone. That would make it more likely that the ECB could curtail their programme of rising interest rates sooner than anticipated.

The ECB has been aggressive in hiking rates this year, with the deposit rate jumping to 1.5%/2% in December, the highest since the crash of 2008. It is expected to be raised to 3% in January and February.

“Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation,” the ECB said last month. “Inflation remains far too high.”

Eurozone inflation data revealed on Friday

This Friday is a big day for the eurozone region, with inflation data for the bloc set to be published. Expectations are at 9.5%, which would be the lowest number since August. However, with the softer French reading, the market may now anticipate a mark below 9.5%.

French data was aided by lower energy prices, with further falls in headline inflation data imminent in the coming months as last year’s sky-high prices drop out of the measurement. But with energy and food prices notoriously volatile, the core inflation number, which omits food and energy, is the one that policymakers will focus on.

If that number comes in lower than expected Friday, expect stocks to continue their cautious rise thus far in 2023. If not, well you need only cast your mind back to 2022 to know what happens next…