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FTSE falls as UK inflation hits double digits for first time in 40 years

·Business Reporter, Yahoo Finance UK
·3 min read
People walk through the lobby of the London Stock Exchange in London. The FTSE 100 was down on the day
The FTSE 100 was lower on Wednesday amid news that UK inflation rose to 10.1% in July. Photo: Suzanne Plunkett/Reuters

The FTSE 100 (^FTSE) was in the red on Wednesday amid news that UK inflation rose to 10.1% in July — up from 9.4% the previous month and the highest in four decades.

London’s benchmark index was 0.3% lower on the day, while the CAC (^FCHI) lost 1% in Paris, and the Frankfurt DAX (^GDAXI) saw a sharper decline of 1.9%.

According to the Office for National Statistics (ONS), surging energy bills was one of the main driving forces behind rising inflation.

Core inflation, which strips out volatile food and energy costs, hit 6.2%. The retail price, which is used for pricing some public services including train fares, rose to 12.3%.

The pound (GBPUSD=X) temporarily pushed higher against the dollar on the back of the figures, fuelled by expectations of further interest rate rises from the Bank of England (BoE).

Sterling rose as much as 0.3% against the dollar to $1.2113, and against the euro it was up 0.1% at 83.93p, before later falling back.

“As we have recently argued, a more hawkish Bank of England policy path isn’t necessarily supportive for the pound, as it comes at the expense of future growth conditions,” Simon Harvey, head of FX analysis at Monex Europe, said.

“We expect the initial rally to fade throughout the day for this reason and favour GBPUSD trading back towards the 1.20 handle.”

Markets are now betting that Threadneedle Street will more than double interest rates over the next nine months after the latest inflation figures outstripped expectations.

Traders are betting on a further 200 basis points of rate rises by May 2023 to help get a handle on surging prices.

Read more: UK inflation: Food and energy bills to cost more than 50% of your pay

Across the pond, the S&P 500 (^GSPC) dipped 0.9% and the tech-heavy Nasdaq (^IXIC) fell 1.5% at the time of the European close. The Dow Jones (^DJI) edged 0.6% lower.

It came as US retail sales flatlined last month as high inflation and rising interest rates forced households to spend more cautiously.

Retail purchases were flat in July after having risen 0.8% in June, according to Commerce Department data.

The muted retail sales figure was down to a 1.8% drop in gasoline sales, a 1.6% fall in cars and parts and a 1.7% decline in other vehicle sales. Excluding cars and gasoline, retail sales rose 0.7%.

Food sales rose 0.2% while building and garden equipment sales were 1.5% higher. Online sales showed the biggest rise, of 2.7%.

Michael Pearce, senior US economist at Capital Economics, said: "Even accounting for weaker growth in August and September, that leaves third quarter consumption growth on track for growth of 2.0%-2.5% annualised. That suggests the risks to our forecasts that GDP growth will rebound to 2.0% lie to the upside."

Read more: UK workers see record drop in pay amid rising bills

Stocks in Asia managed to close higher overnight, with healthy gains following a positive lead from Wall Street.

The Nikkei (^N225) advanced 1.2% in Japan, while the Hang Seng (^HSI) gained 0.6% in Hong Kong, and the Shanghai Composite (000001.SS) was almost 0.5% up.

Watch: How does inflation affect interest rates?