US stocks open sharply lower on inflation data, S&P 500 slips 1.7%

Stock markets plunged deeper into the red on Friday after data showed that US inflation soared to highest level in 40 years in May, much higher than analysts had expected.

In Europe, all of the major stock indices were down by more than two percent by mid-afternoon.

Paris’s blue-chip CAC 40 was showing a loss of 2.3 percent, Frankfurt’s DAX index was down 2.3 percent, Milan’s FTSE MIB shed 4.6 percent, Madrid’s IBEX tumbled 3.5 percent and London’s FTSE dropped by 2.0 percent.

On Wall Street, stocks also dropped sharply at the open.

According to US government data, the consumer price index jumped by 8.6 percent on a 12-month basis in May, the steepest increase since December 1981, driven by surging energy and food prices.

“US CPI for May has come in stronger than expected,” said Stephen Innes of SPI Asset Management. “Inflation is back on the highs; critically, it’s across the board.”

The numbers 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.

A half-point increase in US borrowing costs “was a done deal in any case, so these data aren’t an immediate policy influence,” said Innes.

But it also cemented expectations for another half-point increase in September, the expert said.

The dollar surged against the pound and other leading currencies as investors bet on an increase in US interest rates next week.

Inflation is soaring across the world, prompting the European Central Bank to finally join the Fed in tightening its monetary policy as it announced on Thursday that it would raise rates next month.

Economists warn that surging inflation, driven by rocketing energy prices, could push top economies into recession.

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.

“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 OECD both lowered the global economic growth forecasts for this year earlier this week.

One bright note Friday was data showing that China’s producer price inflation eased last month to its lowest level in more than a year.