French consumer prices fell more sharply than expected in September, data showed today, stoking concerns about the risk of deflation, even if some economists expect prices to nudge higher later this year.
National statistics office Insee said the European-Union harmonised consumer price index fell by 0.2 per cent in September compared to the previous month, and by 0.4 per cent compared to the same period a year earlier.
Economists polled by Reuters had expected prices to remain unchanged month-on-month and to fall 0.2 per cent in the year to September.
"(Inflation) came in weaker than expected on the back of weaker-than-expected energy and services prices," said Laurent Bilke, senior economist with Nomura International.
"That's a clear reminder that there are no inflationary pressures building up at the moment and we are still in a phase in which we can have such downside surprises given energy price developments," he said.
Prices have been falling on an annualised basis since May this year, when inflation slipped into negative territory for the first time since 1957.
The declines have largely been driven by steep drops in the cost of oil and fresh produce, caused by the spike in commodity prices in the middle of last year.
September's figures were no different, showing respective drops of 14.3 per cent and 6.7 per cent year-on-year in the cost of energy and fresh food.
Although lower prices have helped to sustain consumer spending, one of the principal components of economic growth in France, the downward trend in prices has also raised concerns over the risk of a deflationary spiral.
An extended period of price falls would put pressure on company margins and asset values, leading to lower demand and further drops in prices.
"The problem with deflation is the possibility of a spiral and a freeze in demand," said Nicolas Bouzou of Paris-based consultants Asteres.
"There is a fine line between weak prices that support purchasing power and deflation. We are at that line which separates the two now."
However, some analysts have pointed to signs that inflation is starting to edge up again in the euro zone's second-largest economy, and should begin to gather pace once the strong base effects from oil and food prices have disappeared.
Mr Bouzou said that he expected year-on-year changes in consumer prices to head towards zero by the end of the year and maybe even nudge into positive terrain.
Underlying inflation, which strips out the cost of energy and fresh food, rose 2.0 percent year-on-year in September after climbing 2.3 per cent in August.
In a separate statement, the Bank of France said the current account deficit in August more than doubled to €3.7 billion compared with a revised shortfall of €1.5 billion in July.
Reuters