French inflation surges, adding to the economy’s mounting pressures
French inflation has surged unexpectedly to 3.0% year-on-year in September, sharply up from 2.4% in August, driving concerns about economic pressures and purchasing power. Per the full note from ing-think, this uptick, primarily fueled by energy prices, is likely to exacerbate the fiscal challenges already faced by the French economy. Notably, the market is responding to these inflationary pressures, with the EUR/USD now trading at 1.1446 amidst a consensus that anticipates a return to the 1.17 range over the next few months. With no significant calendar catalysts expected in the near term, the market is left to digest these inflationary developments and their implications for policy decisions ahead.
What the desk is arguing
The desk argues that the recent jump in French inflation to 3.0% introduces heightened risks to purchasing power and consumption trends. Per the full note from ing-think, this inflation surge was notably driven by energy costs, marking a continued decline in household purchasing power that could lead to dampened consumer sentiment.
The sharp increase in the harmonised index of consumer prices, which rose to 3.4%, surpassing the forecasts of Insee, highlights a significant macroeconomic challenge for France. With energy inflation expected to persist, particularly as gas prices have not fully fed through to consumers, the economic landscape remains uncertain.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.1700, with a range of 1.1200 to 1.2000 for the March 2026 timeframe. Notable targets from specific firms include: - socgen: 1.2000 (Mar26) - rbc: 1.2000 (Dec26) - danskebank: 1.1100 (Dec26)
This view aligns closely with the broader market sentiment reflected across several firms, particularly as expectations of the EUR/USD trend towards the upper bounds of the forecast range. The desk’s assessment is within the tightly held consensus but slightly lower than targets set by socgen and rbc, indicating a potential bias towards a stronger euro as inflationary pressures materialize.
How other firms see it
Analysts at firms such as barclays and nomura appear aligned with the prevailing sentiment, focusing on the implications of rising inflation in France. Conversely, hsbc holds a more conservative stance, suggesting a lower trajectory for the euro amid fiscal concerns.
With the interplay of inflation and consumer sentiment at stake, the performance of EUR/USD could also be reflected in related dynamics around the ECB's monetary policy decisions, keeping a close eye on any shifts in interest rates and economic guidance from European central bank officials.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01French inflation has accelerated to 3.0%, challenging consumer purchasing power.
- 02Energy price increases are the primary driver, impacting overall inflation and consumption.
- 03Current EUR/USD spot is 1.1446, with a consensus target of 1.1700 for March 2026.
- 04No major calendar catalysts in the upcoming month may prolong market uncertainty.
Market implications
Traders should monitor the EUR/USD for movement towards the 1.17 target as inflation dynamics unfold. A notable resistance level to watch is 1.1500, which could signal the next breakout point. In addition, any comments from the ECB regarding interest rates could influence market sentiment significantly.
Risks to this view
Should the inflationary pressures ease unexpectedly, or if the French government implements sharper fiscal policies to combat inflation, this could reverse the current bearish sentiment on the EUR/USD. Additionally, easing energy prices may result in downward revisions to inflation forecasts, challenging the current bullish outlook.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
Danske Bank | Bearish | 1.1100 |
UBS | Bullish | 1.1800 |
All 27 desk targets for EUR/USD
Articles French inflation surges, adding to the economy’s mounting pressures Published 09:23 France Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download French inflation jumped to 3.0% in September, significantly more than expected, mainly driven by energy. Higher inflation will weigh on purchasing power again at a time when consumption is weakening and rising interest rates are exacerbating France’s fiscal difficulties Charlotte de Montpellier Inflation surprises sharply to the upside French inflation, as measured by the consumer price index, rose more than expected to 3.0% year-on-year in September, up from 2.4% in August. The acceleration was even more pronounced for the harmonised index, which increased from 2.6% to 3.4%.
The figure was also higher than Insee’s latest forecast, which only two weeks ago projected HICP inflation of 2.9% in September. The increase was primarily driven by energy prices, which rose by 21.2% year-on-year, following a 16.7% increase in August. Unlike some other European countries, France has not introduced broad-based reductions in fuel taxes or prices.
The government has instead opted for targeted support measures, which support the incomes of certain households and sectors but do not directly reduce measured inflation. The rise in global oil prices has therefore passed through more directly to French inflation. However, the increase in market gas prices observed in September has not yet been fully passed on to the prices paid by households and should continue to fuel energy inflation in the coming months.
The acceleration was also visible across several other components. Services inflation rose from 1.9% to 2.2%, as the seasonal decline in accommodation and transport prices was less pronounced than a year earlier. Food inflation increased from 1.1% to 1.5%, driven by a sharp rise in fresh food prices, which jumped by 9.9% year-on-year compared with 5.9% in August.
Inflation in other food products remained stable at 0.4%. The decline in manufactured goods prices eased slightly, to -0.3% from -0.4% year-on-year. Today’s figures suggest that inflation is likely to remain above 3% for the rest of 2026 before gradually declining in 2027.
Nevertheless, the rise in French headline inflation masks underlying price pressures that remain relatively weak and should stay below 2%. Excluding energy, inflation should therefore remain more contained in France than in the rest of the eurozone. Weak demand and a soft labour market are limiting wage pressures and companies’ ability to raise prices, particularly in services.
At this stage, a broad-based increase in inflationary pressures in France appears rather unlikely. Consumption disappoints, increasing the risk of stagnation Weak demand was confirmed once again this morning by disappointing household consumption data. In August, household spending on goods fell by 0.5% in volume terms, more than reversing the increase recorded in July.
The July figure was also revised slightly lower, to +0.4% from an initial estimate of +0.5%. The decline in August was mainly due to a 2.3% fall in energy consumption and a 0.4% decrease in food consumption. Purchases of manufactured goods held up better, rising by 0.3%.
Compared with a year earlier, household consumption of goods increased by only 0.8%. Consumption therefore remains subdued and is unlikely to provide more than limited support to third-quarter growth. The renewed rise in inflation will also weigh on purchasing power again and delay the expected recovery in household spending.
After GDP contracted by 0.2% in the first quarter and stagnated in the second, the risk of another quarter of stagnation has increased significantly. Against this backdrop, the government’s recently revised forecast of 0.5% growth for 2026 already appears too optimistic. The inflation shock is arriving precisely when the French economy can least afford it.
Rising debt and interest rates add to the pressure The latest public finance data have further darkened the picture. French public debt increased by almost €60bn in the second quarter, reaching €3,595.5bn, or 119% of GDP, up from 117.5% three months earlier. The government’s forecast of 119.3% of GDP for the end of the year has therefore already almost been reached.
According to government projections, debt would continue to rise to 121.7% of GDP in 2027. This deterioration has been accompanied by a sharp increase in financing costs. The yield on the 10-year French government bond recently reached around 4.8%, while the spread over the German Bund widened to around 120 basis points, compared with 62 at the beginning of June.
The rise in yields has been much faster than anticipated in the budget, which was still based in the spring on a 10-year rate of 3.9% at the end of 2026. As a result, the government now expects interest expenditure to increase from €79bn this year to €91bn in 2027. Compared with forecasts made a year ago, interest expenditure is now expected to be €5bn higher in 2026 and €7bn higher in 2027.
The relatively long maturity of French public debt slows the transmission of higher interest rates to the overall debt stock, but the burden will gradually increase as the debt is refinanced. That said, the French Treasury said that France will have to borrow €340bn in 2027, driven by a record €189bn of maturing debt. Persistent inflation also raises the cost of inflation-linked bonds.
Higher interest rates are therefore becoming a source of fiscal deterioration, making it even more difficult to stabilise public debt. For now, it is difficult to identify an obvious catalyst for a sustained tightening of French spreads. The adoption of a credible budget for 2027, which seems difficult at this stage, could provide temporary relief, but it would not resolve the structural problems facing French public finances.
Attention is therefore increasingly turning to the presidential election and the likely legislative elections in 2027. The problem is that, for now, none of the presidential candidates has presented a sufficiently detailed and credible plan to stabilise the public finances. There is also a significant risk that the next president will once again be left without a clear parliamentary majority.
Markets need a reason to turn more positive on France, and for now there is none. Against this backdrop, France’s risk premium is likely to remain elevated in the coming months. An improvement in the situation in the Middle East and a decline in energy prices could bring European interest rates down.
But in the absence of a political or fiscal improvement in France, the potential for a meaningful tightening of the spread appears limited. High borrowing costs will therefore continue to hold back an economy that is likely to remain subdued in the coming months. Higher rates are not only reflecting France’s fiscal problems; they are now making them worse.
Rates Inflation GDP France Eurozone Deficit Debt Budget Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Charlotte de Montpellier Senior Economist, France and Switzerland Charlotte de Montpellier is a Senior Economist in ING Belgium covering France and Switzerland.
She joined us in February 2018. Prior to this, she worked as a research and teaching assistant at… In this article Inflation surprises sharply to the upside Consumption disappoints, increasing the risk of stagnation Rising debt and interest rates add to the pressure
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