Service costs and electricity prices both rise, as France's inflation unexpectedly jumps to 2.4% in July, fueling expectations of a September rate hike by the European Central Bank

According to information from Zhihui Finance APP, driven by soaring energy prices and accelerating service sector costs, France's inflation rate in July unexpectedly rebounded sharply, far exceeding market expectations and making another rate hike by the European Central Bank in September increasingly likely.

Data released on Friday, July 31, by the French National Institute of Statistics and Economic Studies (Insee) showed that as the eurozone's second-largest economy, France's EU-harmonized Consumer Price Index (HICP) rose by 2.4% year-on-year in July, a significant jump from June's 2.0%. This reading was much higher than all economists’ forecasts in a recent survey—the market had widely expected inflation to remain stable at 2%. In fact, it was only in June that France’s inflation had just dropped back to the European Central Bank’s 2% target, after hovering around or even below 1% for over a year.

Breakdown data revealed the main drivers of this rebound. Energy prices surged especially rapidly, with a year-on-year increase accelerating to 12.4% in July, displaying strong double-digit growth. Meanwhile, inflation in the service sector—closely watched by policymakers—also rose notably, climbing 2.3% year-on-year, up 0.4 percentage points from June’s 1.9%.

Economist Jean Dalbard stated: “France’s inflation increase in July exceeded expectations due to renewed escalation in Middle East conflicts pushing up pump prices, while heatwaves likely supported accommodation prices. However, underlying price pressures remain moderate, consistent with findings from recent cyclical surveys.”

Tightening expectations solidify rapidly, prospects for a September rate hike keep heating up

France is not alone. Data released the previous day showed Germany’s inflation rate rose to 2.8% in July, mainly driven by higher energy prices and the expiration of a fuel tax rebate program. Spain’s inflation data was also higher than expected. This has drawn extra attention to the overall eurozone inflation data due out at 17:00 Beijing time.

Analysts currently expect that, due to Middle East geopolitical tensions, the overall eurozone inflation rate in July will edge up from June’s 2.8% to 2.9%.

The unexpected surge in inflation, together with stronger-than-expected economic output data released Thursday, has made a further tightening move by the European Central Bank at its September meeting seem even more likely. Earlier this month, the ECB chose to hold key rates steady, but most investors have long bet that the next meeting will see a resumption of hikes.

Currently, economists and the market broadly expect the ECB to raise rates by 25 basis points in September, pushing the deposit facility rate further up. France’s above-expectations inflation report has undoubtedly added important weight to this outlook. However, the market remains cautious, as another round of inflation figures will be released before the September monetary policy meeting. If those figures show a clear decline, the current rate hike assumption could still be overturned.

Besides price pressures, official concern in France over public finances is also growing. Budget Minister David Amiel echoed earlier warnings from Finance Minister Bruno Le Maire in an interview on Friday.

Amiel stated: “France’s public debt is like sitting on a powder keg. If no action is taken, the public deficit will rise from 5.1% of GDP in 2025, to nearly 6% in 2027, and close to 7% by 2030—truly a deficit explosion.”