France: the sharp fall in inflation in September contradicts all estimates

Nobody saw it coming… The price rise calmed down very clearly in September. Experts confused.

Inflation France/Zone euro

Published on Saturday September 28, 2024 par Denis Lapalus

Big downward surprise for French inflation

Inflation surprised significantly on the decline in September in France and should continue to moderate. Over one year, according to the provisional estimate made at the end of the month, consumer prices would increase by 1.2% in September 2024, after +1.8% in August. This clear drop in inflation could be explained firstly by a decline in energy prices, particularly those of petroleum products.. Prices of services should slow down over a year and those of manufactured products should decrease at a slightly more sustained pace than in the previous month. Food and tobacco prices are expected to increase over one year at the same rate as the previous month.

Over one month, consumer prices should decrease by 1.2% in September 2024 (after +0.5% in August). In addition to the seasonal effect of the drop in the price of transport (especially air) and accommodation services, there is in particular the marked drop in energy prices, the return to normal of certain prices after the Olympic Games and Paralympics and the fall in the price of health services. Conversely, the prices of manufactured products should increase over one month, driven by the increase in the prices of clothing and shoes. Those of tobacco would be almost stable compared to August. This leads in total to the strongest monthly drop in prices since the series began in 1990.

French inflation well below 2%

French inflation stood at 1.2% in September, down from 1.8% observed in August and much lower than expected. Inflation according to the harmonized index, important for the ECB, stood at 1.5% in September, compared to 2.2% the previous month.

ING experts give us their analysis of the situation. This clear drop in inflation is primarily due to a drop in energy prices of 3.3% over one year, particularly following the drop in petroleum products. But this also follows a drop in the prices of manufactured products (-0.3% compared to September 2023). In addition, services inflation is slowing to 2.5% from 3.0% in August, notably due to the Olympic Games, with some prices returning to normal after increasing during the Games period.

Inflation moderation expected to continue

This moderation of price pressure and the return of inflation below 2% is very good news for the ECB which will have more arguments to continue rate cuts over the coming months in a context where the Economic activity is slowing down very significantly. This is all the more true as the moderation of inflation should continue in France.

Indeed, energy inflation could continue to be negative, as oil prices in euros are likely to remain below their level a year ago for the coming months. In addition, regulated electricity prices must fall by 15% in February 2025. If shipping costs do not increase further as a result of the instability in the Red Sea, the evolution of prices of manufactured goods should remained very weak over the coming months, in a context of slowing global demand and excess Chinese capacity.

There is also no sign of an imminent acceleration in food inflation. Finally, services inflation is expected to remain the main contributor to inflation in the coming months, as past wage increases continue to be passed on by companies in prices. Nevertheless, companies’ pricing intentions are well oriented and the slowdown in economic activity in France is making demand less dynamic, which is not a favorable environment for strong price increases. Therefore, services inflation could continue to moderate over the coming months, gradually reaching 2%.

Overall, French inflation should continue to decline and more quickly than expected. We expect it to remain below 2% in the final months of 2024 and, in the absence of an adverse geopolitical shock, it should also remain below 2% in 2025.

Lower inflation does not mean a rebound in activity

This drop in inflation observed in September and expected for the future is good news for the purchasing power of French households, with wage increases now higher than those in consumer prices. However, it remains to be seen whether this will result in an increase in consumption over the coming months. We believe that a small increase is indeed possible, but that it should not be overestimated. The context of political uncertainty, the difficulties of the European industrial sector and the less solid labor market risk weighing on consumer confidence and their willingness to consume. A further rise in the savings rate is likely. In addition, fiscal policy will become more restrictive and exports will suffer from the expected economic slowdown around the world.

The Olympics boosted GDP growth in the third quarter, but the backlash means GDP is expected to decline in the fourth quarter of 2024. Quarterly growth is expected to be weak in early 2025, bringing average growth for 2025 to 0.7 % compared to 1.1% expected in 2024.

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Inflation on September 2024

Inflation September 2024: Inflation rate 2024, evolution of inflation, price index, drop in purchasing power.