Thursday, 18 May 2006

Stock markets plunge on inflation data

Inflation is still creeping up. Reuters reports the US CPI data:

The Labor Department said the consumer price index rose 0.6 percent in April, while the closely watched core index, which strips out volatile food and energy prices, rose 0.3 percent for a second consecutive month.

Both figures were above expectations on Wall Street, where economists had looked for overall prices to rise 0.5 percent, with core prices up just 0.2 percent...

Over the past 12 months, the core consumer price index has risen 2.3 percent, a pickup from the 2.1 percent gain registered in the period through March and the biggest 12-month advance in more than a year.

Headline inflation has moved up even quicker because of big gains in energy costs, with overall consumer prices up 3.5 percent in the past 12 months.

US stock markets did not like the data.

The data sent stock markets reeling. The blue-chip Dow Jones industrial average closed down 214 points, its biggest one-day drop since March 2003, while the tech-laden Nasdaq composite wiped out its gains for the year.

It is a similar story in Europe. AFX/Forbes reports the inflation data for April.

The euro zone's harmonised index of consumer prices rose a final 2.4 pct year-on-year in April, unchanged from a provisional estimate, EU statistics office Eurostat said.

In March, the HICP rose 2.2 pct year-on-year.

Month-on-month, the HICP rose 0.7 pct in April.

European stock markets reacted in the same way as their US counterparts, as FT reports.

European equities suffered their worst one-day points fall in 3½ years on Wednesday after inflationary fears returned to haunt commodities and stock markets for the second time this week.

The FTSE Eurofirst 300 dropped 2.8 per cent to 1,310.01.

Markets may have been too complacent. Inflation is unlikely to decelerate without a deceleration in economic growth, of which there has been little indication so far. The housing slowdown we have seen so far signals a future economic slowdown, so a stabilisation in inflation is still possible, but probably at least several months down the road. And it might still need a bit more help from central banks.

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