Impact of Lower-Than-Expected French Inflation on ECB Policy and European Equities

France’s December 2025 inflation data came in generally as-expected to slightly lower than earlier consensus, reinforcing the European Central Bank’s ability to maintain the current policy stance and supporting current European equity valuations[2].

Based on INSEE’s release and multiple reporting sources:

• Actuals (INSEE): CPI rose 0.8% YoY (down from 0.9% in November). HICP came in at 0.7% YoY (down from 0.8% in November)[3, 4].
• Consensus heading into the print: Market forecasts cited by outlets and analyst briefings were around 0.9% YoY for CPI and about 0.8% YoY for HICP[3, 4, 5].
• Implication: On a headline basis, the 0.8% CPI print was in line with the 0.9% forecast’s vicinity (i.e., broadly expected), while the 0.7% HICP print was modestly softer relative to an ~0.8% expectation. INSEE attributed the decline largely to falling energy prices, which eased more sharply in December[3, 4].

Net-net: The data do not constitute a major upside surprise but rather confirm continued disinflation, with a modest downside surprise in the HICP measure.

• The ECB held rates steady at the December 2025 meeting, with the deposit facility rate at 2.00%[2, 3].
• Swap pricing shows stable rates expected through most of 2026, with a modest uptick in implied rates by year-end reflecting some probability of a rate increase in the outer years rather than a near-term hike[2].
• The ECB’s own staff projections (December 2025) put headline inflation at around 1.9% in 2026, 1.8% in 2027, and 2.0% in 2028[1, 2, 3].
• Markets do not expect policy changes at the first 2026 meeting on Feb. 5, with the swaps curve implying steady rates for much of the year[2].

• Reinforces hold case: French data support the prevailing “rates-on-hold” narrative given headline inflation remains low and well-contained, reinforcing the ECB’s comfort keeping policy steady[2].
• Caution on additional easing: François Villeroy de Galhau has warned that inflation could fall too far below the 2% target and signaled a reluctance to tolerate a persistent undershoot, suggesting patience rather than further cuts[3].
• Dovish-leaning context: While the lower HICP reading dovetails with the broader eurozone disinflationary trend, the overall ECB communication remains data-dependent and balanced. The majority view appears to be vigilance on services inflation and wages (Isabel Schnabel’s emphasis) rather than a clear tilt toward hikes[2, 3].

• Over the past 29 days, European equity indices have shown solid gains:
  • CAC 40 (France): +1.80%[0]
  • DAX (Germany): +6.94%[0]
  • FTSE 100 (UK): +5.42%[0]
  • STOXX 50 (Eurozone blue chips): +7.07%[0]
• As of today’s close, the CAC 40 stands at 8,167.39[0]. European equity ETFs (VGK: Europe, EWQ: France) are trading near 52-week highs, reflecting investor confidence supported by growth and a benign inflation backdrop[0].

• Supportive environment: Low and stable inflation reduces pressure on the ECB to tighten further, sustaining accommodative financial conditions and supporting equity valuations via lower discount rates.
• Sectoral leadership: Current sector performance shows Industrials (+2.34%), Financials (+2.21%), and Consumer Cyclical (+1.78%) leading, consistent with a growth-sensitive rotation[0].
• Sensitivity to services inflation and policy nuance: Persistently firm services inflation remains a concern highlighted by the ECB, and the majority view remains data-dependent. If services inflation proves stickier than headline prints, it could limit scope for additional easing and temper multiple expansion, even as French headline data are low[2, 3].

• The modestly softer French HICP reading for December reinforces the ECB’s ability to stay on hold in the near term, reducing urgency for further easing and aligning with market expectations of steady rates throughout most of 2026[2].
• For equities, continued low headline inflation supports the current rally, as reflected in strong index performance over the past month and ETFs trading near 52-week highs[0].
• However, risks remain: persistently elevated services inflation, wage dynamics, and cautious ECB messaging point to a data-dependent path rather than a clear trajectory toward cuts. The balance of commentary (Villeroy’s undershoot concerns vs. Schnabel’s upside risks) suggests the ECB will remain patient, monitoring whether inflation settles durably at target or requires adjustments[2, 3].

Investors should monitor the upcoming eurozone HICP release and ECB communications for confirmation of the policy stance and any shift in the balance of risks.

[1] India Data Map - “Inflation Rates Across Europe: 2026 Overview” (https://indiadatamap.com/2026/01/03/inflation-rates-across-europe/)

[2] Morningstar – “Eurozone Inflation: What to Expect from December’s CPI Data” (https://global.morningstar.com/en-nd/economy/eurozone-inflation-what-expect-decembers-cpi-data)

[3] Euronews – “French inflation eases on energy costs ahead of eurozone data release” (https://www.euronews.com/business/2026/01/06/french-inflation-eases-on-energy-costs-ahead-of-eurozone-data-release)

[4] Yahoo Finance UK – “French inflation eases on energy costs ahead of eurozone data release” (https://uk.finance.yahoo.com/news/french-inflation-eases-energy-costs-090516482.html)

[5] Futu News – “Next Week’s Memo” (https://news.futunn.com/en/post/66869798/next-week-s-memo)

[0] 金灵API数据