Wall Street stocks sank after inflation hit a 40-year high

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Stock markets plunged deeper into the red on Friday after data showed US inflation soared to the highest level in more than 40 years in May, far outpacing analyst’s expectations. 

On Wall Street, stocks were deep in negative territory after US government data showed inflation reached 8.6 percent in the 12 months ended in May, the steepest rise in consumer prices since December 1981, on the back of surging energy and food prices.

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The S&P 500 dropped 2.9%, closing out its ninth losing week in the last 10.

The data had been eagerly anticipated as investors hungrily look for clues as to the direction of US interest rates at next week’s meeting of the Federal Reserve.

“The market had expected that we’d see at least a plateauing or flattening out of inflation but it seems that inflation pressures continue to build and we’ve seen a further broadening of price pressures”, said Shaun Osborne, a foreign exchange specialist at Scotiabank. 

“So it seems more entrenched, stickier kind of price or inflation situation”, he further added.

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Osborne said the report will encourage investor debate on whether the US central bank will shift to a 75 basis point interest rate hike next week instead of the planned half-point increase.

But Osborne believes the Fed will go with its original plan, considering a bigger increase would look “panicky”.

Adding to the unease was news that officials in China had once again locked down millions of people for Covid testing owing to another flare-up in cases, dealing a blow to hopes for an economic reopening.

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“Warning signs about the economy are emerging as weekly (US) jobless claims are starting to rise, China’s Covid situation will prove troublesome for supply chains over the next couple of quarters, and as inflationary pressures broaden and show no sign of easing”, said Edward Moya, analyst at OANDA trading group.

“It seems reductions in global growth forecasts will become a steady theme over the next few months and that should complicate how much more tightening we see from central banks”, he said.

The World Bank and Organisation for Economic Co-operation and Development this week each lowered their global economic growth forecasts for 2022.


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