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Surprise French inflation drop adds to signs Europe prices are cooling

FILE PHOTO: Price tags are seen as a woman shops at a local market in Nice

PARIS (Reuters) -Inflation in France unexpectedly dropped well below 7% in December from a record high a month earlier, data showed on Wednesday, the latest sign that slowing energy price rises are helping Europe overcome the worst of the inflation crisis.

The French data added to recent evidence of easing price pressures in the euro zone after Germany's inflation fell for a second month in a row in December, and following lower Spanish inflation figures released last week.

French bond yields eased and European stocks gained after the new data, on the prospect that Europe's inflation crisis may be subsiding.

The inflation rate in France fell to 6.7% in December, according to preliminary EU-harmonised data from the national statistics office INSEE. That was down from 7.1% in November and below the average forecast for 7.2% in a Reuters poll of economists' expectations.

Energy price increases were the lowest since September 2021, rising 15.1% compared with 18.4% in November as wholesale gas prices fell across Europe in recent weeks amid record high temperatures.

French Finance Minister Bruno Le Maire told France Inter radio that inflation would see a downward trend over the course of 2023. He has previously said inflation would remain high until mid-year before falling back.

In the short term, energy prices are likely to add to inflation pressures in January as regulated gas and power prices rose by 15% at the start of the year.

"Nonetheless, the favourable moves in energy prices suggest there may be light at the end of the tunnel," said economist Sylvain Bersinger with consultancy Asteres.

While France has kept inflation lower than most other EU countries thanks to limited increases in regulated gas and power prices, the hit to consumers' purchasing power is nonetheless eroding household confidence.

INSEE said in a separate report on Wednesday that its consumer confidence index fell marginally last month to 82 from 83 in November, well below the long-term average of 100.

While INSEE's monthly survey showed households' concerns about unemployment, their finances and inflation on the rise, dwindling purchasing power is also sparking social tensions.

The yellow vest anti-government movement, which has largely been dormant since large-scale violent street protests in late 2018, plans to hold a demonstration in Paris on Saturday.

(Reporting by Sudip Kar-Gupta and Leigh Thomas; Editing by Andrew Heavens and Frank Jack Daniel)