FTSE closes in the red as US inflation hits new 40-year high

US president Joe Biden (L) and Fed chair Jerome Powell (R). The FTSE 100, European stocks and Wall Street slumped on the higher-than expected inflation report. Photo: Jim Watson/AFP via Getty
US president Joe Biden and federal reserve chair Jerome Powell. The FTSE 100, European stocks and Wall Street slumped on the higher-than expected inflation report. Photo: Jim Watson/AFP via Getty

European markets and Wall Street slumped on Wednesday after US inflation rose to a fresh 40-year high, mounting pressure on the Federal Reserve to reign in prices.

Wall Street’s S&P 500 (^GSPC) lost 16.65 points, or 0.44%, to 3,802.1. The tech-heavy Nasdaq (^IXIC) dipped 0.1%, while the Dow Jones (^DJI) declined 0.6% as trading stopped across Europe.

In London, the FTSE 100 (^FTSE) fell 0.5% as the markets closed. The CAC (^FCHI) lost 0.5% in Paris and the DAX (^GDAXI) tumbled 0.9% in Frankfurt.

It comes after the UK economy grew by more than expected in May despite the cost of living crisis.

Gross domestic product (GDP) expanded 0.5% from April when output declined 0.3%, according to the Office for National Statistics (ONS). Economists polled by Reuters had predicted the economy to stagnate.

Read more: UK economy returns to growth in May despite cost of living crisis

The rise was driven by a bounce in public sector output, resilience in construction and recovery in industrial supply.

Health was the main contributor, with services output up 0.4% as human health and social work activities grew by 2.1%, the ONS said.

Danni Hewson, financial analyst at AJ Bell, said: "After all the doom and gloom about the state of the British economy May’s growth figures might have some people wondering what all the fuss has been about.

"A slight uptick had been anticipated, but at 0.5% the pace of growth has caught many by surprise.

"These figures represent just one month – albeit a crucial one because it means the quarter as a whole doesn’t meet the criteria for negative growth – but one month can never tell the whole story.

“There are headwinds that are impossible to ignore. Retailers, hospitality venues, gyms, museums and children’s play centres are all feeling the weight of high inflation.

"Households are strategically cutting back on their spending, which is a particular blow to the consumer services which still haven’t been able to get anywhere near their pre-pandemic glory days."

The pound (GBPUSD=X) lost earlier gains after rising on the surprisingly upbeat GDP numbers. Sterling fell 0.1% against the dollar to $1.1869. Against the euro (GBPEUR=X) it was unchanged at €1.18.

The dollar rose on the back of the US inflation report, causing the euro (EURUSD=X) to break below parity at $1.002 after falling to parity for the first time in 20 years on Tuesday.

Across the Atlantic, US benchmarks were in the red as recession fears in the world's largest economy mount after inflation topped economists expectations again.

The consumer price index jumped to 9.1% in June, well ahead of the 8.8% forecast. The inflation surge marks the biggest rise since the end of 1981.

Core CPI, which outstrips volatile food and energy prices, came in 5.9% higher, down slightly from last month but still ahead of predictions.

The Federal Reserve faces the uphill battle of wrestling inflation under control and raising rates without pushing the economy into a recession. Markets were betting on a 75 basis point lift, but hotter-than expected figures could force the central to go further.

The data comes as the International Monetary Fund (IMF) cut its growth forecast for the American economy to 2.3% and warned of the threat of surging inflation.

Read more: FTSE 100 shareholders in line for £85bn dividends payout in 2022

Asian markets eked out modest gains despite the downturn on Wall Street but closed mixed overnight.

The Nikkei (^N225) shot up 0.5% in Japan, while the Hang Seng (^HSI) dipped 0.2% in Hong Kong and the Shanghai Composite (000001.SS) gained 0.1%.

Watch: How does inflation affect interest rates?