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UK shares drop 1% as inflation spikes to 40-year high

UK shares drop 1% as inflation spikes to 40-year high 3

By Anisha Sircar and Boleslaw Lasocki

(Reuters) – UK shares fell more than 1% on Wednesday after inflation in the country touched a 40-year-high in May, adding further pressure on the Bank of England to raise interest rates, while falling crude and metals prices sent commodity-linked stocks tumbling.

The exporter-heavy FTSE 100 index fell 1.2% despite weakness in the sterling, while the domestically-focussed mid-cap FTSE 250 index declined 1.4%, erasing nearly all of this week’s gains.

Soaring food prices pushed UK consumer price inflation to a new 40-year high last month at 9.1% — the highest rate out of G7 countries and underlining the severity of the cost-of-living crunch.

“The pressure is now on the Bank of England to apply much cooler compresses in the form of successive rate rises over the next few months to reduce demand and bring down prices,” said Hargreaves Lansdown analyst Susannah Streeter.

“The pound has slipped back against the dollar and worries are mounting that this could flame inflation further by making imported goods even more expensive.”

UK’s main indexes were on pace to end the month between 7% and 8% lower as investor confidence tumbles on rising worries about an impending recession.

The Bank of England last week announced a quarter point rate hike to 1.25% and said it was ready to act “forcefully” to stamp out inflation dangers.

Miners and energy stocks were the biggest drags, falling 3.6% and 3.8% respectively as industrial metals and crude prices plunged. [O/R] [MET/L]

Shares of NatWest Group jumped 2.7% after the British government said it was extending a trading plan to help sell down the taxpayer’s stake in the British lender by another 12 months.

Harbour Energy slid 3.5% after the oil and gas producer told the British government that Britain’s planned windfall tax on the energy sector will shrink the company’s investment in the country.

Meanwhile, Britain is becoming a more closed economy due to Brexit, with damaging long-term implications for productivity and wages, as per a study.

UK shares drop 1% as inflation spikes to 40-year high 4

(Reporting by Boleslaw Lasocki and Anisha Sircar in Bengaluru; editing by Uttaresh.V)

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