French July Inflation Stays at 4%, Fastest in at Least 12 Years

By Sandrine Rastello

Aug. 12 (Bloomberg) -- Inflation in France held at the fastest pace in at least 12 years in July, led by rising food and oil costs.

Consumer prices climbed an annual 4.0 percent based on the European Union's methodology, matching the June rate, which was the highest since Insee, the Paris-based statistics office, began reporting the data in 1996. Economists expected the rate to rise to 4.1 percent, a Bloomberg News survey of 20 forecasts showed. Prices fell 0.3 percent from June.

Faster inflation is making it difficult for the European Central Bank to cut borrowing costs even as President Jean- Claude Trichet says growth will be ``particularly weak'' through the third quarter. Crude oil, which reached a record high of $147.27 a barrel on July 11, has since lost more than 20 percent, indicating consumer prices may rise at a slower pace this month.

``We expect the ECB to remain on hold and cut rates in early 2009 because its room for maneuver is very limited,'' said Tullia Bucco, an economist at Unicredit Banca Mobiliare in Milan. ``Growth has slowed dramatically over the past few months.''

The ECB raised its key rate by a quarter point to 4.25 percent last month, and left it unchanged in August as expansion cools. Higher borrowing costs add to constraints on companies already struggling with a euro around $1.50 at a time when an economic slowdown in the U.S. is damping global expansion.

'Worrying Level'

The oil price's 58 percent increase over the past year has eroded consumer spending and hurt industrial production, which dropped 1.4 percent in the second quarter. Sentiment among French manufacturers fell to the lowest in five years in June, the Bank of France said last month.

Inflation in the 15-nation euro region probably accelerated to 4.1 percent in July, according to the median forecast of 38 economists estimates in a Bloomberg survey. Final EU inflation data will be released August 14.

ECB council member Klaus Liebscher said policy makers remain focused on the ``worrying'' level of inflation, Market News reported today, citing an interview.

Still, Eonia forward contracts show investors scaled back bets on higher ECB rates after a slew of data showed the economy may have contracted in the second quarter. The yield on the December contract was 4.28 today, down from 4.37 at the beginning of the month.

Under the French methodology, which differs from the EU one mostly in the way drug costs are taken into account, prices rose 3.6 percent July from a year earlier, matching the previous month's rate.

To contact the reporters on this story: Sandrine Rastello in Paris at srastello@bloomberg.net;