US inflation shock puts rocket under dollar as bumper rate hikes loom

Central banks in London and Washington appear to be imposing sharper rate hikes next week after data on both sides of the Atlantic showed that inflationary pressures are not going away.

The dollar rocketed as US inflation data for August came in at a higher-than-expected 8.3 percent yesterday.

In the UK, figures showing a drop in unemployment to 3.6 per cent, the lowest level since 1974, pointed to a tight labor market as high-demand workers demand higher wages.

The US Federal Reserve and the Bank of England will focus on trying to cool rampant inflation when they announce interest rate decisions next Wednesday and Thursday.

The markets predict an increase of 0.75 percentage point for both. That would mean a hat-trick of super-sized increases in September, after the European Central Bank also opted for a three-quarter point increase last week.

Neil Wilson, chief market analyst for Markets.com, said the US data “didn’t live up to hopes it would show any real sign of cooling inflationary pressures” and pointed to an “extended walking cycle” for the Fed.

Michael Hewson, chief market analyst at CMC Markets, said inflation numbers are “putting a rocket under the dollar.”

The pound fell from a two-week high of over $1.17 to a low of $1.1498 during a volatile session.

The euro fell to a low of $0.9971. Equity markets turned red at the prospect of steeper US interest rate hikes putting pressure on borrowers.

The FTSE 100 gave up early gains and fell 1.2 percent or 87.17 points to 7385.86, while on Wall Street the Dow Jones Industrial Average fell nearly 4 percent, the S&P 500 fell more than 4 percent and the tech heavy Nasdaq fell more than 5 percent.

The Fed has raised interest rates to curb inflation, which hit a four-decade high of 9.1 percent in June. The reading of 8.3 percent in August was lower than the 8.5 percent in July. But it was higher than the 8.1 percent expected.

Crucially, ‘core’ inflation — which excludes volatile energy and food prices — rose from 5.9 percent to 6.3 percent amid rising rent and health care costs.

In the UK, the Bank of England has made it clear that it will continue to raise interest rates to try to curb inflation, even if the consequences are dire.

Official figures today are expected to show inflation remains high, rising 10.1 percent in July.

Yesterday’s UK figures showed that the percentage of people of working age who are out of the workforce due to long-term illness has reached its highest level since 2005.

A smaller workforce may be contributing to wage inflation pressures as employers look for new hires.