Inflation shock in US puts rocket under dollar as massive rate hikes loom
US inflation shock rockets under dollar as Fed poises to impose sharp rate hikes and BoE urged to raise another 0.5%
Central banks in London and Washington look set to make sharper rate hikes next week after data on both sides of the Atlantic showed that inflationary pressures will not subside.
The dollar rocketed as US inflation data for August came in at a higher-than-expected 8.3 percent yesterday.
In the UK, figures showing unemployment falling to 3.6 percent, the lowest level since 1974, pointed to a tight labor market as in-demand workers demand higher wages.
Balancing exercise: The US Federal Reserve (pictured) and the Bank of England will focus on trying to cool rampant inflation when they announce interest rate decisions next week
The US Federal Reserve and Bank of England will be focused on cooling rampant inflation when they announce interest rate decisions next Wednesday and Thursday.
The markets are recording an increase of 0.75 percentage points for both. That would mark a hat-trick of super-big hikes in September after the European Central Bank also opted for a three-quarter point hike last week.
Neil Wilson, chief market analyst for Markets.com, said the US data had “fallen short of hopes of showing a real sign of cooling inflationary pressures” and pointed to a “prolonged hiking cycle” for the Fed.
Michael Hewson, chief market analyst at CMC Markets, said the inflation numbers “put a missile under the dollar.”
The pound fell from a two-week high of over $1.17 to as low as $1.1498 during a volatile session.
The euro fell to a low of $0.9971. Equity markets turned red on the prospect of even stronger rate hikes in the US, which would put pressure on borrowers.
The FTSE 100 gave up early gains and fell 1.2 percent, or 87.17 points, to 7385.86, while on Wall Street, the Dow Jones Industrial Average fell nearly 4 percent, the S&P 500 fell more than 4 percent, and the tech-heavy Nasdaq fell more than 5 percent.
The Fed raised interest rates to combat inflation, which hit a four-decade high of 9.1 percent in June. August’s 8.3 percent was lower than July’s 8.5 percent. But it was higher than the expected 8.1 percent.
Crucially, the “core inflation rate” — which excludes volatile energy and food prices — rose from 5.9 percent to 6.3 percent amid rising rent and healthcare costs.
In the United Kingdom, the Bank of England has made it clear that it will continue to raise interest rates in an effort to curb inflation, even if the consequences are dire.
Official figures today are expected to show that inflation remains high after 10.1 percent in July.
Yesterday’s UK figures showed that the share of people of working age in the workforce due to long-term illness reached its highest level since 2005.
A smaller workforce may be contributing to wage inflation pressures as employers look to hire new staff.