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French inflation drops
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December 11, 2001: 6:40 a.m. ET
Falling oil prices, manufactured goods opens door for ECB to cut rates
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LONDON (CNN) - French inflation dropped significantly in November, leaving annual inflation at 1.3 percent.
The monthly drop of 0.3 percent was attributed to falling oil prices and widespread drops in the cost of clothes, medicines, telecommunications and health services.
Economists said the drop appeared to be caused by a combination of deflationary pressures of an economic downturn and the advent of the euro - both strengthening the case for European Central Bank interest rate cuts.
"This is a big surprise, it's the core of inflation that's falling," Dominique Barbet, an economist at BNP Paribas told Reuters. "Energy prices were expected to fall but the decline in prices for manufactured goods and services was not."
"This can be attributed to the slowdown and restraint ahead of the euro," Barbet said.
France's consumer price index fell 0.3 percent in November compared to October as measured by the national statistics office (INSEE). Energy prices fell 1.6 percent from October, overall food prices by 0.3 percent and fresh food prices by 2.5 percent.
Manufactured goods prices fell 0.3 percent, with a fall of 0.5 percent for textiles such as clothes and shoes that was not expected until discount sales start in the new year.
Major supermarkets and retailers agreed earlier this year to freeze prices during the euro's introduction in the six-week euro switch period after January 1.
There has been anecdotal evidence that some prices were increased during the summer, which meant there would be no further hikes in prices until early 2002. That lends credence to the idea that mark-ups in prices and any inflationary impact from the change of currency may already have happened.
Cuts in the price of certain medicines forced French drugs prices down 0.9 percent compared to October, while health service prices fell 0.3 percent and telecommunications by 0.2 percent.
Marc Touati, economist at Natexis Banques Populaires, said: "What we're seeing now is a total reverse in what everyone expected ahead of the euro debut; retailers understood that the euro would add new pressures for competitiveness, so they chose to push prices down to attract customers."
The wider euro zone situation is regarded as helpful to the ECB in deciding whether to further cut interest rates at a time of economic downturn.
"These figures prove that the ECB was wrong not to cut rates the last time it met," said Touati.
--Reuters contributed to this report 
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