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French inflation fell

bodes well for price outlook

PARIS: Economists said a surprise 0.2 percent fall in French consumer prices in July was good news, especially as a rise in VAT sales tax is due to start hitting cost-of-living figures in the coming months.

Economists polled by Reuters had forecast a monthly rise of 0.1 percent for a year-on-year rise of 1.7 percent. Instead, prices fell 0.2 percent for a year-on-year rise of 1.5 percent, a low last touched in March 1994.

That compared to flat inflation in June and 0.1 percent fall in July 1994. "It can only be good news when you have inflation running at practically nothing," said one Paris bank economist.

Another said the July figure had led him to shade back his estimate of how much the VAT rise would add to inflation.

The sales tax increase, which went into effect on August 1, pushed the VAT to 20.6 percent from 18.6 percent.

The economist said he now expected the year-on-year inflation figures for December to show a rise of 2.3-2.4 percent instead of 2.5 percent he originally predicted.

Another French economist said he believed the inflation data would lead the Bank of France to take a "benevolent attitude" to what would be "a mechanical" one-off boost to inflation from the VAT rise.

"These inflation figures are welcome for the Bank of France as far as what they indicate for the future," he said.

He predicted the VAT rise would add one percentage point to inflation before the impact started wearing off.

What economists liked about the July figures was that there was a significant fall in manufacturing prices alongside declines in such seasonal items as food and energy.

"Obviously, this is quite a pleasant surprise," said Mark Cliffe, chief international economist at HSBC Markets. At the same time, Cliffe said he still expected French inflation to rise above German inflation at some stage in the autumn.

"There is a real concern of wage rises responding to the rise in inflation," Cliffe added.

Another economist said the inflation data made a 25 basis point cut in the Bank of France's five-to-10 day ceiling rate a virtual certainty on August 31 when the bank's monetary policy council returns from its summer break.

There have been worries that the inflation-wary Bank of France, whose mandate is to ensure price stability, might hold back on further easing of interest rates if the VAT sales tax has too big an impact on prices.-Reuter