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European stock markets mixed as US inflation jumps to 5%

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·Contributor
·3-min read
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Core inflation, which strips out volatile items like food and energy, jumped to 3.8% year-on-year, the fastest annual rate since June 1992 in the US. Photo: Spencer Platt/Getty Images
Core inflation, which strips out volatile items like food and energy, jumped to 3.8% year-on-year, the fastest annual rate since June 1992 in the US. Photo: Spencer Platt/Getty Images

Stock markets in Europe ended mixed on Thursday after a fairly subdued start to the day, as US inflation rose to 5% year-on-year in May, the highest since 2008.

The jump was bigger than expected – CPI was forecast to rise to a 13-year high of 4.7% from a year earlier, up from 4.2% in April, which was already the fastest rise since September 2008.

This will fuel concerns that inflationary pressures are building in the US as the economy rebounds strongly from the pandemic.

Core inflation, which strips out volatile items such as food and energy, jumped to 3.8% year-on-year, the fastest annual rate since June 1992. 

In London, the FTSE 100 (^FTSE) ended 0.1% higher, somewhat aided by a weaker pound, while the CAC (^FCHI) was 0.3% down on the day and the DAX (^GDAXI) 0.1% lower.

"US headline CPI was bound to rise, as a result of base effects related to low oil prices last year, and the recent rise of commodity prices. The good news is that these effects should fade with time, which should lead inflation to fall, potentially even starting next month," said Willem Sels, Chief Investment Officer, Private Banking and Wealth Management, at HSBC.

"But the fact that core CPI also jumped more than expected indicates that there are factors besides oil and commodity prices at work, and that the outlook for inflation remains uncertain."

Watch: What is inflation and why is it important

It came as the European Central Bank's (ECB) governing council decided to leave interest rates on hold across the eurozone.

As widely expected, the headline interest rate will remain at its current record low of 0.0%.

Governors also did not change their €1.85tn (£1.60tn, $2.26tn) pandemic emergency bond-buying scheme, and the asset purchase programme was held at €20bn.

Economists said ahead of the meeting that no changes were expected, despite rising inflation pressures in the eurozone. Inflation rose sharply to 2% in May, meeting the ECB's target but raising fears that prices rises could soon run above acceptable levels.

Rising inflation has led to speculation about when and how the ECB will begin to slow asset purchases under PEPP, which was set up last year to keep finance flowing easily and cheaply to the real economy as the COVID-19 pandemic struck. 

Read more: ECB holds eurozone interest rate at 0%

Across the pond, the S&P 500 (^GSPC) jumped 0.5% and the tech-heavy Nasdaq (^IXIC) climbed 0.5%. The Dow Jones (^DJI) was 0.4% at the time of the European close.

It came as the number of Americans filing new claims for unemployment support hit a fresh pandemic low. There were 376,000 initial claims for state unemployment benefits last week on a seasonally adjusted basis, a drop 9,000 from the prior week, and a near 15-month low.

It was also the sixth consecutive week of decline.

The US dollar hovered near a five-month low against its major peers. Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a note to clients: "It feels like the balance of risk is tilted to the upside on US CPI versus the consensus, which would favour a sell-off in Treasuries – and thus higher yields – and subsequently a stronger USD.”

Elsewhere, Asian stocks were mixed on Thursday as US-China talks helped boost sentiment and bolstered the offshore yuan.

In Japan, the Nikkei (^N225) climbed 0.3% while the Hang Seng (^HSI) dipped 0.16% and the Shanghai Composite (000001.SS) was 0.5% higher.

Watch: What are SPACs?

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