The French inflation report for May was released on Friday morning, coming in at 2.3%, a notch up from preliminary estimates, according to INSEE France. This was also slightly above April’s 2.2%, which was a two-and-a-half year low. Analysts had also estimated May’s figure to remain the same as April.
This increase in inflation was mainly due to food inflation speeding up at 1.3% in May, up from 1.2% in April. This reversed a thirteen-month streak of slowing food inflation, primarily because of fresh products’ costs rebounding, coming in at 3.5%, up from -0.7% in April.
Furthermore, energy costs increased to 5.7% in May, up from 3.8% in April, boosted mainly by petroleum items’ prices, which jumped to 2.9% last month, from -0.7% in April. However, services inflation inched down to 2.8% in May, from 3% in the previous month.
The month-on-month inflation rate was 0% in May, in line with analyst forecasts and a significant drop below April’s 0.5%
France’s surprise election pushes borrowing costs up
Apart from higher inflation, France has also seen borrowing costs soar to their highest level this year, as President Emmanuel Macron called surprise elections to be held between 30 June and 7 July this year.
The 10-year French bond yield jumped to 3.2%, an increase of 10 basis points, which is also the highest number since November 2023.
Vincent Juvyns, global market strategist at JP Morgan said, as reported by the Telegraph, “The surprise decision to call for snap elections adds to uncertainty, particularly as France could face an EU procedure for excessive deficits later on this month.
“Already this morning, one can see the euro trading lower, but I expect the spread between France’s sovereign debt and Germany to grow further.”
CMC Markets analyst Tina Teng told Euronews, “Basically, investors are fleeing French markets. The bond yields rise implies sell off in French government bonds amid uncertainties, coupled with the drop in its stock markets, led by banking stocks.”
The prospect of this surprise election and the possibility of a far-right government winning has also rattled French stock markets, with the CAC 40 index already dipping over 2% on Friday morning and moving towards its worst week since March 2022.
The CAC 40 has already lost over 6% ever since the elections were announced, with investors and the general public alike being worried about the Rassemblement National (RN) party possibly coming into power. This is due to the latter being very vocal about increased spending, should it take the helm, which could push France to the brink of a debt crisis.
Regarding a potential RN win, James Athey, a fund manager at Marlborough Group, said, as reported by Financial Times, “They will be less friendly towards the EU and the things they are talking about from a policy perspective don’t suggest they will come in with a load of fiscal responsibility.
“Even a result which isn’t an outright RN win isn’t likely to be stable at all. And markets hate uncertainty, instability and volatility.”
