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French Inflation Breaks Yet Another Record

In May, consumer prices in the eurozone’s second-largest economy increased 5.8 percent year on year, matching the median estimate of economists polled by Bloomberg, as rising energy and food prices continued to trickle down to other goods and services.

Following strong readings in Germany and Spain, French inflation accelerated to another all-time high, putting pressure on the European Central Bank to raise interest rates more aggressively. 

With data from Germany and Spain already exceeding expectations this week, the French figures point to an overshoot when the eurozone reports inflation figures later Tuesday.

The flurry of economic data comes just over a week before ECB officials meet to decide when to end crisis-era policies such as unprecedented asset purchases and eight years of negative interest rates. 

Meanwhile, fears of stagflation will be fueled by a separate report out of Paris, which shows the French economy contracted 0.2 percent from the previous three months in the first quarter. This is a decrease from an initial reading of no growth. 

They are expected to end net bond purchases in July and confirm plans to raise borrowing costs for the first time in more than a decade.

While Chief Economist Philip Lane stated on Monday that quarter-point increases that month and again in September are a “benchmark pace,” some of his colleagues want to follow the Federal Reserve’s lead by considering a steeper half-point increase. 

The eurozone’s fastest inflation in history is also causing problems for governments, particularly in France, where President Emmanuel Macron faces parliamentary elections next month. He’s already committed about €25 billion ($27 billion) to mitigating the effects of inflation, but he’ll need to budget another €2 billion now that power prices have risen even more. 

According to the statistics agency Insee, these measures have reduced France’s inflation rate by about 2 percentage points.

However, this may not be enough to prevent price worries from weighing on consumer sentiment, which has already fallen below lows set during the pandemic and the Yellow Vest protests over rising living costs.

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