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French Dec inflation rise prompts rate fears

PARIS: French consumer prices rose a higher-than-expected 0.4 percent in December from November and while analysts attributed much of the increase to higher oil costs, they said it could be used as a pretext to raise euro zone interest rates.

The monthly increase outstripped the average forecast in a Reuters poll for a 0.2 percent rise. It left the year-on-year inflation rate at 1.2 percent, the highest since November 1997 when it was 1.3 percent, and up from 0.9 percent last month.

Economists said the headline number was likely to raise bond yields and, coming after similar German inflation price data and unexpectedly high wage demands from a powerful German union, might fan fears euro-zone rates will go up in March.

"Fundamentally there is no domestic pressure, as the core number still suggests, but it's coming at a bad time when there are expectations of rate rises to come" said ABN Amro economist Philippe Brossard. "It will provide a good excuse for the ECB. A rate hike of 25 basis points may come at the meeting in March."

Underlying French inflation, a measure which strips out prices of products set by the government and volatile elements such as oil, climbed 0.1 percent during December and was 0.7 percent higher than the same month last year.

The French data contributed to the malaise on Wednesday in government bond markets, hit by the wage demands and rises in U.S. bond yields. Benchmark 10-year European bond yields climbed near 5.60 percent, their highest level since November 1997.

"The market didn't open up in the best of form, but the French CPI data has really banged another nail in the coffin for higher rates," said Steve Barrow, strategist at Bear Stearns International in London.

"It raises the spectre that the ECB, even when it does raise rates, may just be slipping behind the curve."

The ECB's official target is to keep euro-zone inflation below two percent over the medium term.

Economists cautioned, however, that more than half of the 0.4 percent increase could be accounted for by oil prices and said the effect of higher energy prices on the year-on-year inflation rate would diminish in the months to come.

Oil prices rose 5.2 percent in December and were up 20.5 percent from a year earlier. While oil prices only make up 4.17 percent of the overall CPI index, the sharp December rise was enough to provide 0.22 percentage points of the 0.4 percent increase.

"It's rather strong, but the rise in oil prices accounts for about half of it. It is consistent with an acceleration of prices at the end of 1999 and perhaps a bit into 2000," said Herve Goulletquer, economist at Credit Lyonnais.

French Finance Minister Christian Sautter played down the December numbers, pointing both to the impact of oil prices and the fact that for 1999 as a whole French inflation was an average 0.5 percent, the lowest rate since 1954.-Reuters