LONDON: US and European stocks initially advanced on Friday despite data showing that US inflation rose to a near 40-year high, but later gave up much of if not all of their gains. Government data showed US consumer prices continued to surge in November, climbing 6.8 percent compared to the same month in 2020, the biggest jump since June 1982.
The leap in the consumer price index (CPI) was caused by increases in a wide range of items, including a 6.1 percent jump in gasoline prices, while rents, used car and food costs also increased, according to the Labor Department.
The data was keenly anticipated by markets for its influence on the policy of the US Federal Reserve, which has already signalled it could speed up its removal of stimulus and then proceed with interest rate hikes.
Briefing.com analyst Patrick J. O’Hare said the data showed “the Fed totally missed the mark with its transitory inflation view.”
For months Fed officials and central bankers elsewhere said that the surge in inflation would be “transitory” as it was due to supply chain problems caused by the Covid-19 pandemic.
But recently it has become clear that supply chain bottlenecks won’t be resolved so quickly and workers are pushing for wage increases, which threatens to create more durable inflation pressures.
“The inflation data make it clear that the Fed is going to announce a more aggressive tapering path at next week’s” meeting of its monetary policy committee, said O’Hare. While the removal of Fed stimulus and interest rate hikes should negatively affect stocks, Wall Street futures pushed higher after the data was published and opened with gains. European stocks also perked up. The dollar fell against its major rivals.
The market’s reaction to the data suggest investors believe it “to have eased bets of a sooner rate rise by the Fed. That or the market had built itself up for a much higher reading,” said Fiona Cincotta, senior financial markets analyst at City Index. “However, the initial knee jerk reaction isn’t always the one that stays,” she added.
As the trading session wore on Wall Street stocks gave up much of their gains. Europe’s main indices finished lower. In Europe on Friday, official data revealed that Britain’s economic recovery slowed in October even before the appearance of the Omicron variant that has pushed the UK government to restore restrictions.
UK gross domestic product increased 0.1 percent in October compared with output of 0.6 percent the previous month. Analysts said the growth slowdown made it less likely that the Bank of England would next week raise its main interest rate.
“Although a rate rise can’t be completely ruled out... most bets are off that the bank will push them up so soon, given this latest downbeat reading and the fact that the Omicron variant is still an unknown quantity,” said Susannah Streeter, senior analyst at Hargreaves Lansdown.
“A rate rise in February is more likely to be on the table, as the inflation kettle is set to be whistling loudly by then. That is unless restrictions are ramped up dramatically, pushing the economy into an even tighter recovery position.”
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