Markets tumble as inflation hits 3.8%

Posted by admin on 16 July, 2008 under Business news | Be the First to Comment

The stock market tumbled to its lowest level since 2005 yesterday as grim news on inflation and the worsening financial crisis in the United States hit shares.

Inflation jumped to 3.8 per cent in June, nearly double the Bank of England’s 2 per cent target. The bigger-than-expected rise intensified fears that the Bank would not be able to cut interest rates to stop the economy slipping into recession. Inflation is now running at the fastest pace since the Bank gained independence over interest rates in 1997.

Andrew Sentance, a member of the Bank’s Monetary Policy Committee, warned that living standards would be squeezed and unemployment would rise as the Bank battled to keep inflation under control. He said the Bank was worried that expectations of higher prices would cause inflation to become entrenched as it did in the 1970s.

The Bank of England will be watching today’s labour market data carefully for any signs that average earnings are on the rise.

The Chancellor, Alistair Darling, urged people not to push for higher wages, saying it would only lead to a wage-price spiral. “Whether you are in the private sector or the public sector, whether you are sitting in the boardroom or working on the shop floor, we cannot allow inflationary wage increases,” he said.

Sterling hit $2.0153, its highest against the US dollar for three-and-a-half months, and the pound also rose against the euro.

There was more bad news for the key housing and retail sectors. The Royal Institution of Chartered Surveyors’ survey for June pointed to further house price falls in the months ahead, with sentiment in the property market near record lows. The British Retail Consortium said May’s jump in sales did not last and that retail sales fell last month despite deep discounts to get shoppers through the door.

The FTSE 100 dropped 2.4 per cent as bank stocks hit a 10-year low. Royal Bank of Scotland was the biggest faller, dropping 7 per cent to a new low for the year as fears increased over the housing market in the US, where RBS is the biggest foreign bank.

Ben Bernanke, the chairman of the US Federal Reserve, told Congress that his concerns about economic growth and the threat of inflation had intensified. Shares of Freddie Mac and Fannie Mae, the companies that guarantee or own nearly half of the US’s $12trn mortgages, slumped again as doubts about their future persisted despite the federal government’s rescue plan announced on Monday.

The Dow Jones Industrial Average fell by more than 2 per cent but recovered to trade up slightly by lunchtime in New York after the price of oil tumbled 5 per cent. The fall eased concerns about rocketing energy prices but was caused by an expected drop in demand from the US economy.

News reported by The Independent