Global markets have taken a turn for the worse after new figures revealed US inflation unexpectedly ticked up last month, stamping out hopes of the Fed ending its cycle of interest rate hikes.
The personal-consumption expenditures price index (PCE), seen as the Fed’s preferred gauge of inflation, showed a month-on-month increase of 0.6% in January, up from 0.2% in December.
Analysts said it means the Fed is unlikely to pause interest rate rises as separate figures showed households had stepped up spending during the month.
Michael Hewson, chief market analyst at CMC Markets UK, said the figures “killed stone dead” any prospect of the Fed winding down rate hikes any time soon.
The reading prompted a sell-off across international markets, with top shares in the UK, Europe and the US all down on Friday afternoon.
The FTSE 100, which is significantly internationally focused, dropped by 0.37%, closing 29.06 points lower to 7,878.66.
German and French stocks took a bruising after a strong trading session the previous day. The Dax was down 1.72% and the Cac 40 was down 1.78% at the close.
And US stocks started the day firmly in the red, with the S&P 500 down 1.2% and Dow Jones down 1.1% by the time European markets closed.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Investor optimism had already been hit by a slow puncture this week but it’s deflating more rapidly as the latest data indicates that the work in taming inflation is far from over.
“The realisation that monetary policy will need to be tightened further has pushed global stocks towards the biggest weekly fall since the start of the year.
“The data is another red warning light about the stickiness of prices, and the expectation is that interest rates in the US won’t just have to be hiked higher but left elevated for longer.”
The pound was down by about 0.65% against the US dollar, dipping below 1.2 dollars to 1.194. And sterling slipped by 0.14% to 1.1321 euros.
In company news, shares in British Airways owner IAG tumbled despite the group revealing it had returned to profit in 2022, making £1.1 billion over the year.
The company said capacity across the group – which includes carriers such as Aer Lingus and Iberia – was still at 87% of 2019 levels in the final quarter of 2022 as the airline industry continues to recover after Covid.
Shares in IAG were down 6.5% at the close.
Cineworld’s shares took another hammering on Friday after the struggling chain said it hopes to be back from bankruptcy protection before the middle of the year.
But the company admitted that it expects any future deal with creditors to wipe out its shareholders who should not expect any recovery on their equity interests.
Cineworld’s share price plunged a further 43% on Friday.
The biggest risers on the FTSE 100 were M&G, up 13.8p to 211.3p, Rolls-Royce, up 2.94p to 136.04p, BAE Systems, up 16p to 917.8p, Airtel Africa, up 1.8p to 123.6p, and Frasers Group, up 10.5p to 795p.
The biggest fallers on the FTSE 100 were IAG Group, down 10.68p to 154.76p, Flutter Entertainment, down 860p to 13,065p, Anglo American, down 163.5p to 2,856p, Ocado Group, down 27p to 611.2p, and Entain, down 48.5p to 1,306.5p.
