Stock markets brace on stronger US inflation data

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US inflation rose faster than expected in January, stoking fears that interest rates rises will accelerate this year.

The Consumer Price Index measure of inflation grew by 0.5% against economists’ forecasts of a 0.3% rise.

Earlier this month a report showed accelerating US wage growth. That raised concerns that the US Federal Reserve will have to raise interest rates earlier than previously thought.

The report on wages triggered days of volatility on the financial markets.

The US Bureau of Labour Statistics said there had been inflation across a number of areas including gasoline, clothing, medical care and food.

Over the the 12 months to January inflation remained at 2.1%.

Mitul Patel, head of interest rates at Janus Henderson Investors, said that figure was a “surprise” as economists had been expecting it to ease to 1.9%.

Luke Bartholomew, an investment strategist at Aberdeen Standard Investments said: “There’s a risk that this could pour fuel on the fire of last week’s market sell off.

“That boiled down to real sensitivity to the prospect of higher inflation that markets had anticipated. That nervousness is not going away.”

The signs of rising inflation have stoked investor fears that the Federal Reserve will move more quickly than expected to raise interest rates.

The so-called core index, which strips out volatile food and energy costs, increased 0.3% in January – the most significant rise in a year.

Jacob Deppe, head of trading at online trading platform Infinox said Wednesday’s report showed “an important, albeit slight” rise, while adding to policy questions.

The Federal Reserve uses higher rates to curb inflation, but investors worry that the bank will move too aggressively and higher borrowing costs for companies and consumers will choke economic growth.

“The fear is the Fed hikes too far, too fast,” Mr Deppe said. “US monetary policy will have to walk a tightrope in order not to kill off growth, while steering a path towards normal economic conditions.”

Market reaction

Economists have long said they expect higher inflation due to stronger economic growth and low unemployment.

But those expectations were confounded last year, as relatively soft inflation lagged the roughly 2% target set by the Federal Reserve.

Price and wage increases suggest the dynamics could be changing.

Analysts also expect tax cuts approved last year and increased government spending to add to the inflationary pressures.

The shift has unsettled markets in recent weeks and contributed to sharp swings in stock prices.

Reaction to Wednesday’s report – a different measure of inflation from the one the Federal Reserve typically emphasises – was relatively muted, however.

After opening lower, the Dow was flat in mid-day trade, while the S&P 500 and Nasdaq climbed.

“The fact that… losses are being trimmed, suggests that the market could be slowly starting to get to grips with the new higher inflation environment reality,” said Fiona Cincotta, market analyst at City Index.

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