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French inflation shows surprise fall in July

PARIS: French consumer prices fell a surprising 0.2 percent in July from the previous month, national statistics institute INSEE reported on Friday.

Economists said the decline was particularly good tidings with a rise in the French value-added (VAT) sales tax due to start hitting cost-of-living figures in the coming months.

"It can only be good news when you have inflation running at practically nothing," a Paris bank economist said.

French inflation, bumping along the bottom for many months, was regarded for a long time as a dead issue. But the VAT rise to 20.6 percent from 18.6 this month and a four percent jump in the minimum wage last month has sparked renewed concern.

The tax rise, introduced on August 1, is part of efforts by the new conservative government of Prime Minister Alain Juppe to cut the budget deficit to meet terms for a single European currency.

Economists had forecast that July prices would rise by 0.1 percent to show a year-on-year increase of 1.7 percent. Instead, the 0.2 percent July fall translated into a year-on-year rise of 1.5 percent, a low last touched in March 1994.

What economists liked was that manufacturing prices fell along with such seasonal items as food and energy.

Inflation was one of a number of figures on Friday, including May current account balance of payments data showing a seasonally adjusted surplus of 7.4 billion francs ($1.5 billion), compared with a revised 10.2 billion ($2.1 billion) in April.

Some economists have said the Bank of France, whose mandate includes ensuring price stability, might slow its pace of monetary easing because of the sales tax's inflationary impact.

But others have argued that the bank, whose medium-term inflation target is two percent, will regard the tax rise as a one-off event and take a benevolent attitude toward its effects.

The rise is seen boosting inflation temporarily to between 2.3 and 2.5 percent from current levels. Next month's consumer price figure for August, which will include the impact of the VAT rise, will be scrutinized for signs of any upsurge.

Some economists say anecdotal evidence suggests stores are passing on the rise to consumers. But others say competition is so intense that retailers will try to hold the line on prices.

"Obviously, this (the inflation data) is quite a pleasant surprise," said Mark Cliffe, chief international economist at HSBC Markets. But he said he still expected French inflation to start outpacing German inflation at some stage in the autumn.

"There is a real concern about wage rises responding to the rise in inflation," Cliffe added.-Reuter