French inflation threat eases

French consumers have seen prices fall to their lowest level this year

PARIS, France -- France's rate of inflation fell to a five-month low in May, as weaker oil prices and a stronger euro eased pressure for an imminent hike in interest rates.

Consumer prices edged up 0.1 percent last month from April, putting the key annual inflation rate in Europe's third largest economy at 1.5 percent, the French statistics institute INSEE said on Wednesday.

The May level is the lowest this year and well below the European Central Bank's target ceiling of 2 percent.

Economists said inflation appears to have hit a low point from peak levels of a year earlier when oil and energy costs soared as the Organization of Petroleum Exporting Countries cut crude productions to lift prices.

INSEE said oil prices were down 7.1 percent in May from a year earlier, while energy costs declined by 4.6 percent.

A jump in the euro to a 17-month high against the U.S. dollar and a five-month high against the yen has also helped to ease inflation, with a stronger single currency making imports to the eurozone cheaper.

"The easing of inflation is principally the result of energy price falls... In the coming months, the trend should go on thanks to a deflationist effect on the euro," Olivia De Kersauzon, an economist at CCF, told Reuters.

The French numbers came as the European Union's statistics office reported that preliminary estimates showed inflation across the euro zone fell back below 2 percent in May for the first time since December 2001.

Both reports should silence calls for the ECB to increase its key interest rate, which has been at 3.25 percent for the past seven months after a series of reductions last year aimed at easing the impact of the global economic slowdown.

Many economist say an increase in rates now could hurt business activity and threaten the eurozone's fragile economic. There are already concerns that hefty pay rise settlements in Germany and large budget deficits in a number of Europe countries are putting upward pressure on prices.

"This is the low point,'' Olivier Gasnier, an economist at Societe Generale, told Reuters. "Consumer prices will go back up. We've been saying this for months.''