Inflation fears hit European markets

FEARS of rising inflation and higher interest rates triggered a share sell-off across Europe yesterday wiping billions of euro off market values.

In Dublin the ISEQ lost 1.65%, or more than €1.5 billion of its value, yesterday with most major shares, from banks to building companies, losing close to 2% of their value on the day.

In London the FTSE fell 1.83% and the CAC in France was off 1.95% and in Germany the Dax was down 2%.

The European reaction followed a dip of 1% in New York on Tuesday when the Producer Price Index, a key pointer to inflation going forward, hit its highest point in 15 years.

US markets have been slipping since early in September and the key S&P 500 is down 5.2% over the period driven south by the twin factors of oil and inflation/interest rates, analysts said.

Reuters reported yesterday a rash of data over the past week showed headline inflation rates spiking to their highest in more than a decade in the United States and to multi-year highs in Europe. Inflation rates that strip out highly volatile energy and food prices remain much more modest, but the oil factor has had investors nervous for some time.

Policy-makers in the US fear persistently high oil prices and overall inflation rates may start to impact on wages and alter market and household psychology by embedding expectations of higher inflation.

"One option that is clearly not on the table is allowing an unacceptable rise in inflation", said San Francisco Federal Reserve Bank chief Janet Yellen, echoing the views of Fed policy-makers in recent weeks.

US producer prices, prices received by farms, factories and refineries, rose 6.9% in September from a year earlier, the biggest increase since November 1990 when the Iraqi invasion of Kuwait three months earlier sent oil soaring.

Data on Friday showed annual consumer price inflation at a 14-year high of 4.7% in September this year.

Eurozone consumer prices accelerated to a four-year high in September of 2.6%, well above the European Central Bank's preferred 2% ceiling.

However, Peter Jackson, market analyst with Bloxham Stockbrokers, said the "reality is that the oil price element has been hitting the US markets since September and they are down 6% overall.

"By comparison the European markets had trended up to three and a half year highs.

"It is the case that when the US sneezes Europe catches a cold and the European markets were reacting to the high state of nervousness gripping the world's biggest stock market now," he said.

Several warnings issued by US Federal Reserve officials have indicated in recent weeks that key US interest rates, which are already up 2.75% to 3.75% in the past 15 months, are heading even higher.