Eco Analysis - Energy prices to put upward pressure on French inflation in December and January (M. Martinez)

Eco Analysis - Energy prices to put upward pressure on French inflation in December and January (M. Martinez)

Energy prices to put upward pressure on French inflation in December and January
French inflation gauges have been slowing down since the beginning of the year. After another drop in annual rates in November, we expect this trend to break in January, owing mainly to an increase in energy and food prices. Indeed, energy prices have been constrained by the government over past months, but are likely to catch up in December and January. We expect FRCPIxt to rise by 1.75% yoy in the first two months of 2013.

■ Excise duties on gasoline prices to rise progressively

Following up on a promise made by François Hollande during his presidential campaign, excise duties on fuels (TICPE) were temporary reduced by €3ct per litre between 29 August and 30 November. At the same time, gasoline retailers matched the price cut, leading to an average reduction of €6ct per litre. Last week, the government announced that the return to normal TICPE excise duties will occur in four stages, beginning with a €1ct hike on 1 December, followed by €½ct on 11 December, €½ct on 21 December and lastly €1ct on 11 January. We expect gasoline prices to gradually increase by €6ct during this period. The cumulated impact on headline inflation in December and January is estimated at 20-25bp.

■ Gas prices to rise by 3.0% on 1 January.

Gas tariffs are administered by the government in France. Household tariffs increased by 2% in October, as the government apparently ignored the recommendation of the French energy regulator (Commission de regulation de l'énergie, CRE) which estimated that prices should be increased by 6.1%. As a result, ANODE, the French gas suppliers association, took the French government to court, and subsequently, on 29 November, the Conseil d'Etat (Counsel of State) which hears cases against decisions made by the government, ruled in favour of ANODE. On 10 December, the government is to announce the official hike, which is to take effect on 1 January. We expect the hike to be close to 3.0% which translates into a 3bp hike in headline inflation.

■ Food prices to grow in line with average seasonality

We expect food prices to increase by 1.0% over the next three months (November to January), thereby adding 15bp to the headline figures, representing the average observed over the last 10 winters (from November to January). In actual fact, food prices grew at a slower pace (0.6%) between November 2011 and January 2012. However, we believe the summer surge in global agricultural prices is likely to have exerted upward pressure.

■ French inflation to slow down in 2013 and accelerate in 2014

On a different note, household and motor insurance tariffs are set to increase by 2.0-3.0bp in January (adding 3bp to headline figures). Assuming an average seasonal profile for other core prices, we expect French inflation (FRCPIxt) to print at 1.75% yoy in January. Looking ahead, we expect French HICP inflation to grow at 1.9% yoy in 2013 and 2.4% yoy in 2014. As part of our central scenario, we take into account the VAT hike in January 2014 (see PM Ayrault sends positive signals on competitiveness). Note that our monthly inflation forecasts are available on Bloomberg (function SXEI).

MARTINEZ Michel