French Inflation Slowed More Than Expected in August

By Francois de Beaupuy and Helene Fouquet

Sept. 12 (Bloomberg) -- Inflation in France slowed more than expected in August from the peak reached in the two previous months as oil prices dropped.

Consumer prices climbed an annual 3.5 percent based on the European Union's methodology, down from 4 percent in July and June, which was the highest since Insee, the Paris-based statistics office, began reporting the data in 1996. Economists expected the rate to fall to 3.7 percent, according to the median of 21 forecasts in a Bloomberg News survey. Prices fell 0.1 percent from July.

``The inflation peak was really related to global markets movements and we're returning now to a more traditional level for France,'' Alexandre Bourgeois, an economist with Natixis SA in Paris in an interview with Bloomberg Television. ``We expect inflation to be at 2.9 percent by the end of 2008, we clearly entered an inflation slowdown phase.''

The economy of the 15 nations using the euro contracted in the second quarter and is struggling to recover in the third. The European Central Bank nevertheless raised interest rates to a seven-year high in July and said it will act to ensure that faster inflation doesn't become entrenched as workers seek compensation for higher food and energy costs.

Oil Decline

Inflation in the 15-nation euro region slowed to 3.8 percent last month from a 16-year high of 4.1 percent in July, the European Commission said in a preliminary report on Aug. 29. Inflation is slowing because crude oil has dropped 30 percent since reaching a record high of $147.27 a barrel on July 11 and is trading near a five-month low.

``The inflation peak is behind is,'' Finance Minister Christine Lagarde said in Nice, France today. ``Clearly it's good news as it means lower prices for customers.''

The decline in oil prices ``should quickly lift the consumers's'' spirit, said Gilles Moec an economist at Bank of America in London, in a research note on Sept. 10. ``Still, there was more than just an inflation-induced consumer strike'' to the contraction in French economic growth in the second quarter, he said, pointing to falling exports and investment.

Under the French methodology, which differs from the EU one mostly in the way drug costs are taken into account, consumer prices rose 3.2 percent in August from a year earlier.

To contact the reporter on this story: Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net.