Wall Street plunges as US inflation shock sets scene for bumper rate hikes

SHARES on Wall Street tumbled last night as fresh fears over inflation paved the way for another round of bumper rate hikes.

On a brutal night for financial markets, the dollar also soared as US inflation data for August came in at a higher than expected 8.3pc yesterday.

And in the UK, figures showing a fall in unemployment to 3.6pc, the lowest level since 1974, signalled a tight labour market as in-demand workers push for higher wages. The US Federal Reserve and the Bank of England will be focused on trying to cool rampant inflation when they announce rates decisions on Wednesday and Thursday next week.

Markets are pencilling in 0.75 percentage point hikes for both. That would mean a hat-trick of super-sized increases in September after the European Central Bank also chose a three-quarter point rise last week. Neil Wilson, chief market analyst for Markets.com, said the US figures ‘failed to live up to hopes it would show a real sign of cooling in inflation pressure’ and pointed to a ‘prolonged hiking cycle’ for the Fed.

Michael Hewson, chief market analyst at CMC Markets, said the inflation numbers ‘put a rocket under the dollar’.

The pound fell back during a volatile session from a two-week high of more than $1.17 to as low as $1.1498. The euro slipped to as low as $0.9971. Stock markets turned red on the prospect of more steep US rate hikes putting pressure on borrowers. The FTSE 100 gave up early gains to fall by 1.2pc, or 87.17 points, to 7385.86 while on Wall Street the Dow Jones Industrial Average fell nearly 4pc, the S&P 500 was down more than 4pc and the tech-heavy Nasdaq tumbled more than 5pc.

The Fed has been hiking rates to combat inflation, which hit a four-decade high of 9.1pc in June. August’s reading of 8.3pc was down from 8.5pc in July. But it was higher than the 8.1pc expected.

Crucially, the ‘core’ rate of inflation – stripping out volatile energy and food prices – climbed from 5.9pc to 6.3pc amid rising costs for rents and healthcare.

In the UK, the Bank of England has made clear it will keep raising interest rates to try to bring down inflation, even if it brings tough consequences. Official figures today are expected to show inflation remains high having hit 10.1pc in July.

Yesterday’s UK figures showed the proportion of working-age people out of the labour force due to long-term sickness hit its highest level since 2005.

A smaller workforce potentially adds to wage inflation pressures as employers look to hire new staff.