French Economy Contracts 0.1% in Q1 as Inflation Hits 27-Month High of 2.8% in May, Driven by Near-17% Energy Price Surge Linked to Iran War

France's economy shrank by 0.1% in the first quarter of 2026, while preliminary data from French statistics agency INSEE shows consumer price inflation rose to 2.8% year-on-year in May — the highest reading since February 2024 and up from 2.5% in April. The May inflation figure came in slightly below a Reuters poll median forecast of 2.9%, with a range of 2.3% to 3.1% across 19 analysts surveyed. On a monthly basis, prices rose 0.1% from April. The harmonised rate, adjusted for comparison with other eurozone countries, also printed at 2.8%. The dominant driver was a nearly 17% year-on-year jump in energy prices, particularly natural gas, which INSEE attributed in part to the ongoing Iran war. Critically, energy cost pressure has not yet fed materially into broader prices: services inflation edged up only slightly to 2.0% from 1.9%, while manufactured goods prices fell for a second consecutive month, down 0.6%. The data lands at a delicate moment for European capital markets and interest rate expectations. Investors are simultaneously assessing a possible 60-day ceasefire extension between the US and Iran, which would ease energy price pressure if confirmed. European equity markets — the FTSE 100, DAX, and CAC 40 — were set to open marginally higher on Friday on ceasefire optimism, after Thursday's Stoxx 600 fell 0.5%. The macro read-through is clear: persistent energy-driven inflation in the eurozone's second-largest economy constrains the pace at which the European Central Bank can ease rates, keeping borrowing costs elevated for issuers in the European debt and equity markets.