Today, the FTSE 100 index experienced a significant drop of up to 2%, following investor shock over inflation numbers that were higher than anticipated.
This led to a substantial £40 billion decrease in the index’s total value, marking the most challenging trading day since July.
The consumer prices index (CPI) climbed to 4% in December, a full percentage point higher than in November, as reported by the Office for National Statistics. This was contrary to economists’ predictions, which had placed the figure at 3.8%.
Jane Sydenham, Investment Director at Rathbones, commented that consistently achieving the Bank of England’s 2% inflation target will become increasingly difficult, anticipating more variability in monthly figures moving forward.
However, Julian Jessop, an economist at the Institute of Economic Affairs, emphasized the broader perspective, maintaining that inflation is expected to decrease. He noted, “Inflation is likely to align with the two percent target by April, and the markets are poised to factor in significant rate cuts later this year. The current inflation rate remains below the Bank of England’s projections, which anticipated an average rate of 4.6% in the fourth quarter of 2023 and 4.4% in the first quarter of 2024.”
Jessop also pointed out that the higher inflation in December was partly due to temporary factors, such as changes in tobacco duties, airfares, and various elements of ‘recreation and culture’. Meanwhile, he observed that the labour market is cooling, and there is continued weakness in the growth of both money supply and credit.
