European stocks opened higher on Wednesday as UK inflation surged past the Bank of England (BoE) benchmark and investors await the US Federal Reserve interest rate announcement later on Wednesday.
The FTSE 100 (^FTSE) opened up 0.6% on Wednesday morning despite data showing the cost of living rose to the highest level since 2019 in May.
According to official figures from the Office for National Statistics (ONS) the consumer price index (CPI) jumped to 2.1%, above the 2% BoE target. Analysts expected it to rise to 1.8%, from April’s 1.5%.
Transport made the largest annual upward contribution to inflation. Rising prices for fuels, clothing, recreational goods such as games and recording media and meals pushed the rate higher on a monthly basis, rising 0.5% in May alone.
“The Bank of England was always expecting inflation to overshoot its target this spring, but it has taken the position that this is a short term blip caused by rock bottom prices a year earlier, and as soon as they naturally fall out of the figures, inflation will drop away again,” said personal finance analyst, Hargreaves Lansdown, Sarah Coles. “It isn’t worried by the rise and it isn’t expecting to raise interest rates in the immediate future to bring it back down again.”
Oil prices are rallying as investors bet on looming supply crunch, with both benchmarks rising to record highs in recent days after hitting rock bottom last year. Crude (CL=F) was trading up 0.6% to $72.52 (£51.36), brent (BZ=F) was also up 0.6% to $74.41 around 8:30AM in London.
Across the Atlantic, US stocks were lower after retail sales figures showed Americans slowed their spending last month. US retail spending fell 1.3% in May amid supply chain disruptions and rising producer prices, according to data from the Commerce Department.
The Fed is back in the fray and its two-day monetary policy meeting is the big event that could indicate whether the US central bank will tweak its interest rates outlook. The Federal Open Market Committee (FOMC) kicked off its meeting on Tuesday and chair Jerome Powell is expected to make concluding remarks on Wednesday.
Watch: What is inflation and why is it important?
Investors will keep a close tab on whether the Federal Reserve will stick with its dovish stance as optimism in America’s economy grows, and for any hint of Powell paring back the bond buying programme.
Economic indicators across the board have shown signs of improvement, most notably the US’ vaccination push, which reduced mortality rates. This comes against a backdrop of falling jobless claims, surging purchasing managers’ index (PMI) data and a spike in non-farm payrolls.
While jobless claims have dropped to pandemic-lows, the headline non-farm figure has repeatedly failed to match estimates in the last few months. This is important as Powell said he needs to see a “string of strong jobs reports” to consider tapering the Fed’s current stimulus programme.
Asian stocks struggled overnight as investors await to Chinese retail and industrial production data.
The Nikkei (^N225) fell 0.5% in Japan after figures showed the country’s trade surplus jumped 49.6% last month, compared to the year before.
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