FTSE plummets as UK inflation hits highest level since 1982


The FTSE 100 slumped after new figures showed UK inflation hit 9.1% in May. Photo: Victoria Jones/PA

European stocks fell on Wednesday as investors digest the latest inflation data that shows Britain cost of living crisis worsened when consumer prices hit their highest level since May 1982.

The FTSE 100 (^FTSE) fell 1.6% after the opening bell, the French CAC (^FCHI) fell 1.8% and the DAX (^GDAXI) fell 2.2% to Frankfurt.

According to Office of National Statistics the consumer price index reached 9.1% in May, compared to 9% the previous month and marks a new high in 40 years.

Rising prices for food and soft drinks, compared to declines a year ago, pushed up last month’s inflation rate, the ONS said.

Read more: UK inflation hits new 40-year high of 9.1%

Prices rose 0.7% in the month alone, a slowdown from the 2.5% pace recorded in April when the 54% cap on energy prices went into effect.

The retail price index, which is used to determine the price of train tickets and to which certain indexed bonds are indexed, climbed 11.7%, a new high in 40 years.

Soaring inflation will put additional pressure on household budgets to tighten, intensify demands for wage increases to offset rising prices, and make it more difficult to resolve labor disputes such as railway strikes.

The latest gauge puts further pressure on the Bank of England to step up its efforts to rein in soaring prices across the economy. Threadneedle Streets expects inflation to top 11% in October, significantly higher than other similar G7 countries.

Susannah Streeter, senior investment and market analyst, Hargreaves Lansdown, said: “The Bank of England has already forecast inflation to hit 11% by the fall, and it is gradually closing in on that ugly marker.

“In contrast, if interest rates were at 13% in March 1982, when today they are only 1.25%. With the economy increasingly sweaty, the pressure is now exerted on the Bank of England to apply much fresher compresses in the form of successive interest rate hikes over the next few months to try to reduce demand and bring prices down.”

The British Pound (GBPUSD=X) extended its decline against the Dollar as Britain’s inflation nightmare worsens. The pound fell 0.8% to $1.218. Against the euro (GBPEUR=X), it was down 0.2% to €1.16.

Analysts said ‘weakness in the pound’ is not helping inflation and Britain’s economy, largely due to the strength of the US dollar, which sent the pound down more than 12% l ‘last year.

Michael Hewson, chief market analyst at CMC Markets, said: “This is largely due to the increased aggressiveness of the US central bank which seems determined to export its own inflation problem to the rest of the world by increasing rates sharply in the coming months.

“No one is suggesting the Bank of England match the Fed’s hike for the hike, but they should at least give the impression of being serious about addressing the issues posed by a weaker pound, as well as trying to keep the interest rate differential as narrow as possible, if only to dampen the inflationary impulse which is currently affecting basic energy products in the first place, as well as foodstuffs, which are all denominated in US dollars . »

Read more: Bank of England must follow Fed on rate hike to boost pound, MPC member says

Across the Atlantic, US benchmarks rallied on Tuesday after posting their worst week since March 2020, with the bullish mood spreading to cryptocurrencies and growth stocks.

The markets were closed on Monday for the June 19 bank holiday.

Wall Street’s S&P 500 (^GSPC) advanced 89.95 points, or 2.5%, to 3,764.79. The tech-heavy Nasdaq (^IXIC) gained 2.5%, while the Dow Jones (^DJI) closed 2.2% higher.

Asian stocks were in the red overnight with the Nikkei (^N225) down 0.4% in Japan, while the Hang Seng (^HSI) fell 2.3% in Hong Kong and the Shanghai Composite (000001.SS) lost 1.2%.

Watch: How does inflation affect interest rates?