Wall Street stocks surge as US consumer inflation cools to 8.5%

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Wall Street stocks surge as US consumer inflation cools to 8.5% – but analysts say the Fed will maintain interest rate hikes

US Stock markets roared after inflation data was lower than expected, raising hopes that price rises had peaked.

The Dow Jones, a key index on Wall Street, surged 1.6 per cent to its highest level in two months after figures showed inflation was running at 8.5 per cent last month, down from the four-decade high of 9.1 per cent recorded in June and below what analysts had predicted.

The figure is in stark contrast to the UK where inflation hit 9.4 per cent in June, and is expected to hit 13.3 per cent later in the year.

Stocks surged on Wall Street as investors welcomed a softer-than-expected inflation print for July

Stocks surged on Wall Street as investors welcomed a softer-than-expected inflation print for July

The lower-than-expected reading also boosted the S&P 500 index – up 2.1 per cent – and the tech-heavy Nasdaq index – up 2.9 per cent.

‘Inflation has been expected to peak over the summer for some time, so it was reassuring for markets that there are clear signs that this looks to be happening,’ said Oliver Blackbourn, a portfolio manager at asset management group Janus Henderson.

The decline was driven by a sharp drop in petrol prices, which fell 7.7 per cent last month as global oil prices eased back after surging following Russia’s invasion of Ukraine.

But food prices continued to increase sharply by 10.9 per cent in July, the largest rise in 43 years, potentially signalling more pain for lower-income households who spend more of their money on essentials such as food and energy. 

The steeper-than- expected drop in inflation is expected to reduce pressure on the Federal Reserve, the US central bank, to keep aggressively raising interest rates despite the figure remaining well above its 2 per cent target.

Before the new data, markets had been expecting the Fed to raise rates to 3.6 per cent by the end of the year, its highest level in over a decade, but this dropped to 3.4 per cent following the better-than-expected inflation figures.

Bets that the central bank will hike interest rates by 0.75 per cent at its next meeting in September also fell back.

But Rob Clarry, investment strategist at wealth manager Evelyn Partners, said more substantial falls in inflation would be needed before the US central bank changed its current course.

He added that the ‘tight’ US jobs market could continue to push up inflation as firms raise wages to attract workers.

‘While today’s inflation figure is likely to be welcomed by investors, the data does not change our view that US interest rates will continue to increase,’ he said.

The fall in inflation will also be a boon for Joe Biden’s administration, which this week scored a crucial victory after the Inflation Reduction Act, a £604billion package of measures aimed at lowering healthcare costs and raising taxes on corporations, was passed by the US Congress.

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