Stock markets slide and bond yields jump as US inflation surprises on the upside

Jasper Jolly
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Inflation has jumped in the US (Source: Getty)

US inflation rose faster than expected in January, sending bond yields higher amid fears over central bank tightening which triggered last week's stocks sell-off.

The consumer price index of inflation rose by 2.1 per cent in the year to January, according to the US Bureau of Labor Statistics, faster than the 1.9 per cent expected by economists.

Signs of higher inflation in hourly earnings data at the start of the month prompted the dramatic correction in global equity markets over the course of last week which wiped billions off the value of companies worldwide.

Read more: Wall Street closes in correction territory as stocks tumble

While most economists believe economic fundamentals remain strong around the world, faster consumer price rises would likely spur the US Federal Reserve to act quicker to stanch the flow of easy money to the economy, raising borrowing costs for firms.

Today's data showed core inflation, which strips out the effects of food and energy (including oil), rose to 1.8 per cent annually, also higher than expected, after a 0.3 per cent increase in January.

The renewed signs of building inflationary pressure in the US economy put Wall Street on alert, with indications from pre-market trading showing a steep fall is likely as US markets open.

European stock markets slumped after the data were released, with the FTSE 100 giving up all of the day's gains at the time of writing to lose 0.1 per cent.

Read more: Bank of England signals markets to expect earlier interest rate hike

Germany's Dax index fell by around 0.6 per cent before recovering, while France's Cac 40 fell by 0.3 per cent before rebounding.

Bond markets sold off in the immediate aftermath of the announcement, with the US 10-year Treasury yield rising to highs of 2.88 per cent, its highest since Monday, according to Tradeweb, after previously holding at or below 2.84 per cent.

The figures could add to pressure on stocks, according to Neil Birrell, chief investment officer at Premier Asset Management. He said: “The January US CPI just announced came out above expectations at 0.5 per cent, meaning that we are likely to see higher bond yields, a higher dollar and lower equity markets."

Risks to the inflation outlook are very much two-sided, said Mitul Patel, head of interest rates at Janus Henderson Investors. US President Donald Trump's fiscal stimulus plans may further stoke the inflationary fire, but downside risks remain. He said: "Should recent oil price declines extend further and money supply remain weak, inflation may move lower."

Read more: US stocks slide to biggest loss under Trump presidency on inflation fears

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