European markets closed lower on Wednesday as the UK announced it saw the largest ever month-on-month inflation increase since records began in 1997.
The Consumer Price Index (CPI) measure of inflation surged to 3.2% in August, up from 2% in July, which was the Bank of England’s target.
This jump was partly because the UK government’s ‘Eat Out to Help Out’ scheme last August had pushed prices down significantly. But it is also because of increases in the price of commodities like food, petrol and car, that look set to stick around.
The Bank of England expects inflation to hit 4% by the end of the year, and some investors are anticipating a sharper increase in interest rates next year.
“Already prices paid by consumers are rising well above the target rate but it’s also the 5.9% increase in the price of goods bought and sold by UK manufacturers which will be unpalatable food for thought for policy makers at the Bank of England,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
“For months members of the monetary policy committee have been reading from the same menu, underlining that higher prices should be transitory. But with producer price inflation soaring, shipping costs showing little sign of cooling, commodity prices heating up, and vacancies tipping one million, there is a growing chance that one mess of a hot dinner could be arriving on their plates.”
Across the pond, US stocks were mixed as European markets closed for the day.
Recent data coming out of the US showed inflation in the country came down from a 13-year high, but consumer prices are more than they were pre-pandemic.
They rose 5.3% in the year ended in August, slightly below the 5.4% increase in June and July.
“We believe the global economic recovery is on track as the Federal Reserve will unwind bond purchases very gradually, while rising vaccination rates will pave the way for governments to push ahead with reopening," said Mark Haefele, chief investment Officer, at UBS Global Wealth Management
"Investors can also consider diversifying across regions and themes with structural trends like sustainability and smart mobility, or defensive elements such as cybersecurity and healthcare."
Over in Asia, Japan's Nikkei (^N225) closed 0.5% lower. In Hong Kong, the Hang Seng (^HSI) fell 1.6% as casino stocks listed in the city plunged amid fears over tighter regulations. The Shanghai Composite (000001.SS) dipped 0.2% as data showed China’s retail sales growing at a much lower pace than expected in August.
"The slowdown in China has roots that are unclear, surely the clampdown on real estate and debt are an issue, but the underlying reason may be a recognition that the medium-term and long-term prospect for growth are once again reverting to their long-term trend as less productive services grow in the economy," said Sebastien Galy, senior macro strategist at Nordea Asset Management.
Watch: What is inflation and why is it important?