France sees inflation pick-up as energy costs surge

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by Shaun Richards

This morning has seen signs of quite a pick-up in inflation in France. Let us start at the beginning of the inflation chain.

In October 2021, the rise of industrial producer prices reached 2.6% over a month (after +1.7% in the previous month) and 14,0% over a year (after +11.0% in the previous month). These were the highest increases recorded in the available data since January 1995. Prices accelerated over a month, both on the home market (+2.9% after +1.7%) and the foreign markets (+2.1% after +1.7%).

As you can see producer prices were on quite a tear in October with the fastest rise for this series so for a bit over 25 years. So a bit longer than the life of the European Central Bank. Also the rise is more pronounced for domestic goods than foreign ones.

Energy Costs

An issue which has been on our minds since the rises beginning in September arrived in full force with the energy costs move.

 The prices of trade services of gas through mains accelerated strongly (+28.2% after +14.7%): a further increase in regulated tariffs and tensions on international markets have caused prices to soar. The prices of electricity production and trade rose by 5.7% (after +5.9%), driven by those on the wholesale market. At last, the prices of steam and air conditioning supply services sped up also sharply (+20.1% after +14.8%), in connection with gas price increases.

The only surprise there is maybe that the electricity prices did not follow so much but that may be the influence of France’s relatively string position in terms of nuclear power. However if we bring the issue up to date then the pressure is certainly on if not on the gas pipelines.

EUROPEAN ENERGY CRISIS: European benchmark natural gas prices (Dutch TTF) climb again above the key €100 per MWh (which translates into ~$33 per mBtu or $190 per barrel of oil equivalent). The tide continues to rise. And European governments keep their heads buried in the sand. ( JavierBlas)

As Hard-Fi put it.

Pressure, pressure, pressure pressure pressure
Feel the pressure
Pressure, pressure, pressure pressure pressure

This is being driven by this.

LONDON, Nov 29 (Reuters) – Europe’s gas prices have started rising again as a colder-than-normal start to winter makes unusually large inroads into the already meagre volume of gas in storage.

Futures prices for gas delivered in January 2022 via the Dutch Title Transfer Facility have climbed to more than 93 euros per megawatt-hour (MWh), up from a recent low of 65 euros a month ago.

As you can see the situation in terms of the gas price has continued in spite of the fact that we have seen quite a fall in the price of crude oil ( around US $10 as I type this) since the emergence of the Omicron variant of Covid. So there is no real link here although one or two places had been buying crude oil for power production. Ironically I think Japan was buying before the recent price fall.

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Although if the lower oil price lasts it will help with this.

In the wake of crude oil prices, the prices of refined petroleum accelerated over a month in October 2021 (+14.7% after +3.4%), reaching their highest level since January 2014. Over a year, they soared by 106.8% (after +80.5% in the previous month).

Also there is a kicker to all of this one might not have expected and in the middle of this month Lobservateur was reporting this.

Temporarily, until the cost of electricity returns to decent values, part of the production from the Saint-Saulvien site will be relocated to Germany. It is the German steel group Saarsthal, the buyer of Ascoval since August 2021, which has decided to repatriate 40% of production to the parent company.

Yes nuclear power France is losing out to a more coal driven Germany because of this.

With a megawatt price that has doubled or even tripled, the company is losing considerable sums every month and is selling at a loss………From December until March 2022, one week per month will be nonworking.

Not quite what one might expect although the underlying theme here is that production which requires lots of energy is uneconomic right now.

Consumer Inflation

The headlines here provide a bit of initial relief.

Over a year, the Consumer Price Index (CPI) should rise by 2.8% in November 2021, after +2.6% in the previous month, according to the provisional estimate made at the end of the month. This increase in inflation should result from the acceleration in energy prices, manufactured good prices and – to a lesser extent – service prices. The prices of tobacco should be stable and those of food should slow down.

This is because in a slightly confusing situation that is not the same as what we call CPI in the UK and even better for the Euro area. That measure is below and is higher.

Year on year, the Harmonised Index of Consumer Prices should rise by 3.4% after +3.2% in October. Over one month, it should increase by 0.4% as in the previous month.

I am afraid that some of the names of inflation measures are misleading for the unwary as a game of alphabetti spaghetti gets played with some or all of the letters H I C and P.

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The detail is for the French variant but gives us a clue at least.

Over one month, consumer prices should rise by 0.4% as in October. The prices of services should accelerate and those of food should rebound. The prices of manufactured goods should advance, over a month, at the same rate as in the previous month. The prices of tobacco should be stable and those of energy should slow down.

House Prices

The numbers here are behind the times but were even higher than the current inflation numbers so would be pulling inflation even higher.

In Q2 2021, the house prices in metropolitan France continued to rise: +1.4% compared to the previous quarter with seasonnally adjusted (s.a.) data, after +1.3% in the previous quarter……..Year on year, house prices kept rising (+5.7% after +5.6% in the previous quarter).

Comment

So far France has recorded milder inflation numbers than its peers in the Euro area but as we move into winter and the weather gets colder it may well start to catch up. Businesses moving to Germany for lower energy costs is in another form a hint of that. As to the claimed Transitory theme the lack of stored gas supplies this year means that the issue will return whenever there is a cold snap. To be more precise when there is a cold snap with little wind. The wind issue arises because over the past couple of weeks the UK has increasingly been supplying power to France ( 2 GW as I type this) and the UK relies on wind power ( 10 GW as I type this)

If we switch now to the cost of inflation this most directly relates to wages and this from Le Monde shows that there are worries about real wages.

The minimum wage could be upgraded by 0.5% to 0.6% in the 1 st  January 2022………Today, this ritual takes place in some particular context, because the minimum wage was increased by 2.2% on 1 st  October to 1 589.47 gross per month (for a full time). This is the first time since 2011 that an “sub-annual” increase has been decided.

Meanwhile the ECB meets on the 16th of December and with Euro area inflation now at 4.9% it is in a quandary. Because it’s policy continues to be one of trying to raise inflation via negative interest-rates and QE bond buying.

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