US inflasion

Hopes that the Federal Reserve can engineer a soft landing for the US economy took a hit yesterday when a crucial measure of inflation came in higher than forecast and triggered a sharp sell-off on Wall Street. The consumer price index increased 0.1 per cent for August, above economists’ expectations for a 0.1 per cent drop. Most worryingly for policymakers, core inflation, which strips out volatile items such as energy and food, rose by 0.6 per cent for an annual increase of 6.3 per cent, compared with 5.9 per cent recorded for July. Wall Street was caught off guard by the hotter-than-expected inflation figures.

The S&P 500 tumbled 3.1 per cent during morning trading yesterday, while the Nasdaq Composite, stacked with technology companies more sensitive to changes in interest rate expectations, fell more than 4 per cent. In government debt markets, the yield on the 2-year US Treasury, which is more sensitive to interest rate expectations, surged by 0.20 percentage points at 3.78 per cent, having traded at 3.52 per cent before the release of the data. The odds that the Federal Reserve would opt for a full percentage point rate rise in September rose to 22 per cent, according to CME Group, versus 0 per cent at the start of the week. Most economists are forecasting another 0.75 percentage point rate rise, which would lift the fed funds rate to a new target range of 3 per cent-3.25 per cent.

The jump in inflation came despite a fall in petrol prices.

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