Market inflation fears stoked as UK prices jump 1.5%

MANCHESTER, UNITED KINGDOM - MAY 13: A woman is seen wearing a face mask outside non-essential retail store Primark on May 13, 2021 in Manchester, United Kingdom. (Photo by Charlotte Tattersall/Getty Images)

Investors are concerned about rapidly rising prices in the economy. Photo: Charlotte Tattersall/Getty Images

Investor fears about runaway global inflation were revived on Wednesday as new data showed surging prices in Britain.

Stock markets in Europe opened sharply lower after numbers from the Office for National Statistics showed UK inflation more than doubled last month to 1.5%. The figure was slightly more than economists were expecting.

While the headline rate remains below the Bank of England’s 2% target, the rapid rise will fuel concerns that it could soon spiral out of control. Runaway inflation could force the central bank to raise interest rates, which could prematurely curtail the UK economy’s recovery from the pandemic.

“At current levels, inflation is nothing to fret about, but there is rising concern that the fiscal and monetary response to the pandemic has sown the seeds of an inflationary scare further down the road,” said Laith Khalaf, a financial analyst at AJ Bell.

“For the moment, the Bank of England is dismissing consumer price increases as a natural bounce back from the depths of the pandemic last spring. But the economic recovery could be a Trojan horse, smuggling inflation into the UK, right under the nose of central bankers.”

Watch: What is inflation and why is it important?

The FTSE 100 (^FTSE) sunk 1.2% at the open. The pound was flat against the euro (GBP/EUR) and the dollar (GBP/USD).

“Inflation rising is a sign that the economy is building steam and there’s a question over how far above target the Bank of England will allow price rises to go,” said Ed Monk, associate director for Personal Investing at Fidelity International. 

“That, combined with already inflated valuations in parts of the stock market, means investors in shares should expect some volatility in the months ahead.”

Read more: UK recovery moving into ‘fast lane’ as tourism, real estate output grows

Continental European markets also registered sharp declined on Wednesday morning. France’s CAC 40 (^FCHI) dropped 1%, the German DAX (^GDAXI) fell 1%, Spain’s IBEX 35 (^IBEX) declined 0.8%, and the FTSE MIB (FTSEMIB.MI) was down 1% shortly after the open.

Inflation fears have been growing in financial markets around the world as investors fret that central banks are underestimating the inflationary pressures in the economy. Last week, US inflation data showed price rises were already more than double the US Federal Reserve’s target.

US markets closed in the red overnight and Asian markets were mixed. Japan’s Nikkei (^N225) fell 1.2% and China’s Shanghai Composite (000001.SS) lost half a percent, but the Hong Kong Hang Seng (^HSI) rallied 1.4%, the Shenzhen Component (399001.SZ) gained 0.2%, and the South Korean KOSPI (^KS11) rose 1.2%.

Futures were pointing to a lower open on Wall Street. S&P 500 futures (ES=F) were down 0.3%, Dow Jones futures (YM=F) were 0.3% lower, and Nasdaq futures (NQ=F) lost 0.5%.