SG: Eco Analysis - French inflation fractionally up, at 2.5% in October, Euro area inflation set to be firm at 3.0% (M. Martinez)

2011.11.10 04:37 AM
Eco Analysis - French inflation fractionally up, at 2.5% in October, Euro area inflation set to be firm at 3.0% (M. Martinez)

■ Overall price pressures remained firm in October in France and in the euro area

Inflation remains firm, despite the fact the euro debt crisis is curbing economic growth. Consumer price inflation in France edged higher in October. The harmonized rate increased to 2.5% yoy from 2.4%, while the national measure rose from 2.2% to 2.3%. Separately, the German HICP was slightly higher than the preliminary estimate (+0.1% mom, +2.9% yoy). Despite this fact, there is no change in our forecast for the euro-area measure, which is still expected to have been steady at 3.0% yoy (+0.3% mom). All these data indicate that overall price pressures remained firm in October in the euro area. Indeed, HICP probably rose by 5.1% on a 3 month annualized basis in the euro area in October (France: 3.3%, Germany: 1.1%, Italy: 13.4%, Spain: 6.4%).

■ No big surprise on French inflation in October

French Inflation developments were in line with our expectations in October (while the HCPI was slightly higher than median expectations). Compared to September, the national measure rose by 0.2%, though in seasonally adjusted terms the increase was higher (+0.3% mom). On the details, four factors were mainly responsible for the rise in inflation.

One, fresh food increased by 1.6%. This seasonal increase was slightly higher than expected. Two, services prices slowed unexpectedly in September, to 1.5% yoy in September from 1.8% yoy in August, thus withdrawing 0.1% mom to the headline figure. The fall was mainly driven by hotels and restaurants and was reversed as expected in October. Three, apparel prices increased by 2.2% mom after the end of the Summer sales. Four, tobacco prices increased by 6% on October 17. Note also that energy prices did not subtract to inflation although gasoline/diesel prices were down 0.3% mom on average. Our view is that inflation peaked up in October. It is set to remain close to levels close to 2.5% for several months, then will begin to recede to 2.0% from March 2012.

■ Disinflation will slowly materialize

Looking ahead, the euro economy may slip into a mild recession (our 2012 GDP growth forecast is just 0%). However, it is not sure how quickly inflation will abate. In our opinion, the hope that the sharp economic slowdown might damp price pressure will take time to materialize and thus, disinflation will only modest boost consumer's purchasing power. First, oil prices are stabilizing at high level given the geopolitical risk premium, which is a different situation from the one we experience in 2009. Secondly, the recession scenario we have in mind is not severe enough to trigger a sharp downturn of core inflation, given the nominal rigidities in core inflation. Moreover, we cannot rule out the possibility that some States will decide to increase VAT rates to reduce public deficit as France showed earlier this week. France will create an intermediate VAT rate at 7.0% from January 2012. As such, this will increase prices by 0.1% which is roughly our estimate of the negative impact on 2012 inflation of our lower GDP growth estimate (+0.4% instead of + 1.1%).

■ French Industrial output suggests firm Q3 GDP growth

Industrial production fell by 1.7% mom in September (+2.3% yoy), which only partially offset the significant rise recorded in July and August. The Q3 11 growth still remains very satisfying (+0.8% q/q) which is consistent with firm GDP growth in Q3 11 (+0.4% q/q).

Energy production eased as expected (-2.9% mom) in September. Indeed, weather conditions and temperatures were better than usual. The bad news in this big picture is that capital goods (-2.8% mom) and durable consumer goods (-3.8% mom) were the main culprit of the manufacturing output decline. It might indicate that companies are already holding back their capex decisions, which is clearly our economic scenario.