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FTSE 100 and Wall Street rise after US inflation slows in July

The FTSE 100 and Wall Street rallied on the latest US inflation data. Photo: Frederic J. Brown/AFP via Getty
The FTSE 100 and Wall Street rallied on the latest US inflation data. Photo: Frederic J. Brown/AFP via Getty

European and Wall Street shares rose after softer-than-expected US inflation print on Wednesday dented expectations of more aggressive monetary policy tightening from the Federal Reserve.

In London, the FTSE 100 (^FTSE) closed 0.2% up, France’s CAC (^FCHI) rose 0.7% and the DAX (^GDAXI) gained 1.2% in Germany.

"The US has spent the day celebrating their declining inflation reading, but rising gas prices in Europe highlight how we are likely to continue seeing upside for prices closer to home, said Joshua Mahony, senior market analyst at online trading platform IG.

Recently more positive US corporate earnings and unexpectedly strong job numbers have eased fears about an imminent recession in the world's largest economy, helping global stocks rebound from lows.

Read more: Bank of England 'likely' to raise interest rates further, says deputy governor

The consumer price index rose 8.5% in the 12 months to July, much cooler than the 9.1% rise the previous month, and below a fall to 8.7% economists had estimated.

The driving force behind the decline was largely due to recent sharp falls in gasoline and other energy prices. That offset rises in food and accommodation costs, according to the Bureau of Labor Statistics' data.

Core inflation, which strips out volatile food and energy components, rose 5.9%, behind forecasts of 6.1%.

Inflationary pressures in America eased on the back of lower energy and petrol prices, but prices remain near a 40-year high.

The figures are likely to fuel speculation that the Federal Reserve will shift its focus away from taming inflation with interest rate rises and instead worry about a looming recession.

Wednesday inflation data saw the pound (GBPUSD=X) surged against a weaker dollar. Sterling jumped 1.5% against the US currency to $1.225, the highest level since the start of August. Against the euro (GBPEUR=X) it was little unchanged at €1.18.

Across the Atlantic, US benchmarks rallied at the open as traders tone down their bets on further interest rate rises by the Fed after US inflation fell short of forecasts.

Wall Street’s S&P 500 (^GSPC) added 2%, while the tech-heavy Nasdaq (^IXIC) jumped 2.5%. The bluechip Dow Jones (^DJI) advanced 1.7% at London's close.

Read more: UK needs to allocate £44bn to protect public services from shocks

Chris Beauchamp, chief market analyst at IG, said: "The softer inflation print has given risk assets the new lease on life they were looking for, and seems to confirm the idea that some sort of Fed pause might take place in the final months of 2022.

"Futures are surging and the dollar is firmly on the back foot. It looks like the drop in commodity prices has done its job, and while inflation is still at levels that would be considered eye-watering a year ago, the turn in direction has been greeted with relief by risk assets.

"Having struggled for a few days, equities seem well-placed to push on from here, extending their summer rally."

Asian stocks closed in the red overnight with the Nikkei (^N225) down 0.7% in Tokyo, while the Hang Seng (^HSI) edged 2.2% lower in Hong Kong and the Shanghai Composite (000001.SS) dipped 0.5%.

Watch: How does inflation affect interest rates?