Inflation continues to rise gradually, driven by the contribution of energy prices, now slightly positive. Core inflation continues to trend slightly downwards.
We expect these trends to continue in 2017 and forecast a mild increase in inflation (from +0.5% today to +1.3% year-on-year at end-2017).
Inflation, less low, will reduce household purchasing power gains. As a result, consumer spending is expected to slow down significantly, placing a drag on growth.
At this time last year, we observed that inflation in France remained uncomfortably low, even more so than growth. This observation is still true today. At 1.1% year-on-year in Q3 2016, growth was identical to the Q3 2015 pace. On the inflation front, things appear to be a bit better: Inflation rose from 0% year-on-year in November 2015 to 0.5% a year later according to preliminary INSEE estimates. Yet this mild acceleration is mainly due to energy prices, the contribution of which was less and less negative over the course of the year before becoming slightly positive (-0.5 percentage points in November 2015, +0.2 points in November 2016). However, core inflation slowed slightly over the period, to 0.5% year-on-year in November 2016 from 0.8% in November 2015.
We expect these trends to continue in 2017. Headline inflation is expected to pick up from an average annual rate of 0.2% in 2016 to 1% in 2017, due solely to the impact of the expected rebound in oil prices. Core inflation should, however, slow down slightly, from 0.6% in 2016 to 0.4% in 2017. Two factors are contributing to the low level of core inflation. First, there is a currency effect: for a few more months, the past appreciation of the euro will continue to have a downward impact on durable core goods prices. The opposite, inflationary, effects of the very recent depreciation of the euro will materialize later, and in a context still characterised by significant slack in the economy. This is the second explanation of low inflation.
To read the entire report Please click on the pdf File Below
by Hélène BAUDCHON