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FTSE heads lower as UK inflation soars to decade high of 5.1%

FTSE heads lower, inflation highest in decade
The cost of clothing, fuel and second-hand cars all contributed to the surge, as well as the costs of goods produced by factories and the price of raw materials. Photo: Hannah McKay/Reuters

The FTSE 100 (^FTSE) stumbled against its continental peers on Wednesday as UK inflation rocketed to a 10-year high.

London’s benchmark index fell 0.6% on the day, while the French CAC (^FCHI) rose 0.5% and the DAX (^GDAXI) was 0.2% higher in Germany.

It came as the latest figures from the Office for National Statistics showed that inflation surged to its highest level in more than a decade last month. The consumer price index jumped to 5.1% in November, well above forecasts and the highest since September 2011.

The cost of clothing, fuel and second-hand cars all contributed to the surge, as well as the costs of goods produced by factories and the price of raw materials.

This now raises questions as to whether the Bank of England will raise interest rates at its meeting on Thursday. The MPC will now have to weigh up the surge in price rises, and the International Monetary Fund (IMF) discouraging it from delaying any further, against the threat of the Omicron variant.

Read more: Food and fuel prices push UK inflation to 10-year high

“This gives the Bank enough ammunition to raise interest rates tomorrow, but we still think it is more likely to keep its powder dry until it knows more about the Omicron situation,” Paul Dales, chief UK economist at Capital Economics, said.

The pound pushed higher against the dollar (GBPUSD=X) on the back of the news, gaining as much as 0.4% to hit $1.3283, its highest since 7 December but still far off its June 1.4250 high.

Watch: What is inflation and why is it important?

Across the pond, the S&P 500 (^GSPC) dipped 0.2% and the tech-heavy Nasdaq (^IXIC) fell 0.6%. The Dow Jones (^DJI) edged 0.2% lower at the time of the European close.

The muted mood came as US retail sales came in weaker than expected last month, suggesting that consumer demand may be cooling.

Spending at retailers and food services outlets rose just 0.3% month-on-month in November, much weaker than the 0.8% gain expected thanks to Black Friday and early Christmas spending.

Spending at gas stations jumped 1.7% during the month, as higher prices hit motorists, while electronics and appliance stores saw a 4.6% drop, and department store sales tumbled 5.4%.

Meanwhile, the latest inflation figures solidified bets that the Federal Reserve might announce a speedier winddown of its pandemic-era monetary stimulus later in the day.

US consumer prices jumped 6.8% in the year to November, the fastest in almost 40 years. Goods and services producers lifted their prices by nearly 10%, as supply bottlenecks kept pushing up costs.

Michael Hewson of CMC Markets said: “The Fed does need to tread carefully however given the sharp declines seen in stock markets over concerns that they might overplay their hawkish hand. However if they really do feel they are behind the curve, they may also feel they have no choice to go a little bit faster, especially as core PCE is likely to come in above their highest expectations back in September.”

Read more: IMF warns UK may have to bring back furlough scheme amid Omicron threat

Asian markets were mixed on Wednesday with the Nikkei (^N225) closing just 0.1% higher in Japan while the Hang Seng (^HSI) fell 0.9% and the Shanghai Composite (000001.SS) dipped 0.4%.

Chinese blue chips were little moved as retail sales missed forecasts with a rise of 3.9%, down from 4.9% in October ,while industrial output gained a firmer-than-expected 3.6%, up from 3.5%.

The most recent China trade numbers showed a big jump in imports in November helped by inventory rebuilding as well as decent demand around “Singles Day” rising 31.7%, against an expectation of 21.5%. A rebound in coal imports to deal with an energy shortfall as well higher demand for copper also helped boost the data.

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