The Daily Telegraph

Pound falls as US prices stoke recession fears

Large rise in housing costs expected to drive further aggressive rate rises by the Federal Reserve

- By Eir Nolsøe

The pound dropped sharply against the dollar last night and stocks fell around the world after unexpected­ly high US inflation data raised fears of a recession in the world’s largest economy. Consumer prices in America rose by 8.3pc in the 12 months to August, the US Bureau of Statistics said, faster than the 8.1pc economists had expected. The persistenc­e of price rises fuelled market expectatio­ns that the Federal Reserve will push ahead with sharp rate rises to tame inflation.

THE pound dropped sharply against the dollar last night and stocks fell around the world after unexpected­ly high US inflation data raised fears of a recession in the world’s largest economy.

Consumer prices in America rose by 8.3pc in the 12 months to August, the US Bureau of Statistics said, faster than the 8.1pc economists had expected.

Despite overshooti­ng forecasts, annual inflation fell for the second month in a row and has fallen consistent­ly from a peak of 9.1pc in June.

But core inflation – a measure of price rises excluding the more volatile food and energy indices – rose last month. A large rise in housing costs prompted core inflation to jump from 5.9pc to 6.3pc, close to the March peak of 6.5pc.

The persistenc­e of price rises fuelled market expectatio­ns that the Federal Reserve will push ahead with aggressive rate rises to tame inflation.

The prospect of more large rate rises makes hopes of a so-called “soft landing” for the US economy more remote.

Stocks sold off sharply yesterday, amid fears that the Fed will be forced to trigger a recession to get inflation under control.

Mark Cabana, Bank of America’s global head of US rates strategy, said in a television interview: “The Fed is probably going to overdo it. We think that the Fed will try and stick to this higherfor-longer mantra. That’s probably going to result in a recession.”

Goldman Sachs doubled its forecast for the Fed’s expected rate rise in December, predicting a 50 basis point lift. The investment bank now expects the US interest rate to increase by 175 basis points by the end of the year.

The prospect of higher interest rates sparked a rally for the dollar, which caused the pound to drop 1.4pc against the US currency, falling to $1.1502.

Investors are now all but certain the Fed will raise its interest rate target by 75 basis points for the third time in a row when policymake­rs meet next week.

Recession fears saw the S&P 500 and Dow Jones stock indexes both fall 3pc on Wall Street while the Nasdaq dropped more than 4pc.

JP Morgan, the biggest bank in the US, added to concerns about the health of America’s economy as Daniel Pinto, one of the bank’s most senior executives, said investment banking revenues in the current quarter could be as much as 50pc lower than last year. Rival Goldman Sachs began cutting jobs earlier this week amid a dearth of deals.

Persistent inflation increases the pressure on President Joe Biden, who faces mid-term elections in November that are likely to be dominated by cost of living concerns.

Mr Biden said yesterday that inflation would take “more time and resolve”, but said the figures “show more progress in bringing global inflation down in the US economy”.

Housing, food and medical costs were the largest contributo­rs to the monthly rise, but these increases were mostly offset by a sharp 10.6pc drop in the gas prices, according to the US Bureau of Labour Statistics.

Food prices leapt by 11.4pc in August, the largest 12-month rise since May 1979. Electricit­y bills jumped the most since 1981, gaining 15.8pc from the same period a year ago.

Concerns about a downturn in the US saw the FTSE 100 fall by more than 1.2pc, with similar drops seen on bourses across Europe.

If the Fed opts for a 75 basis point increase next week, it will bring its target range for the federal funds rate to 3-3.25pc. Some analysts have even discussed the possibilit­y of a historic 100 basis point uptick.

The Bank of England’s Monetary Policy Committee will also meet on Thursday Sept 22 to decide on interest rates, following a week-long delay to mourn the passing of Queen Elizabeth II.

The Bank is expected to increase borrowing costs by 0.5 points, although it could opt for an even larger move.

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