FTSE 100 suffers worst day in five months after inflation surprise dampens rate cut bets

London’s FTSE 100 has clocked its worst day in five months after new figures showed a surprise uptick in inflation at the end of last year.

The bluechip index closed 1.48 per cent lower at 7,446.29 on Wednesday, while the FTSE 250, which is more aligned with the health of the UK economy, plunged 1.71 per cent to trade at 18,864.37.

The sell-off came after inflation picked up again in December, surprising markets which had expected a slight fall.

According to figures from the Office for National Statistics (ONS), the consumer price index came in at four per cent in the final month of the year, up from 3.9 per cent the month before.

The uptick in inflation was driven by rising alcohol and tobacco prices after the government announced higher taxes on both products in November’s Autumn Statement.

As fears grow over the potential persistence in inflation, markets dampened bets that the Bank of England would start cutting rates in May.

“Today a bucket of cold water doused at least the hope that interest rate cuts would come in the first half of the year,” said Danni Hewson, head of financial analysis at AJ Bell.

“Whilst markets are still hopeful rate cuts will come thick later this year, the date for that to commence has slipped back.”

Traders now expect rate cuts to begin in June. In response, the pound jumped as much as 0.46 per cent to hit $1.269.

The yield on 10-year gilts jumped around 18 basis points – the biggest intra-day rise since last February.

Just seven stocks on the FTSE 100 made gains on Wednesday, led by engineer IMI, which received an upgrade at Goldman Sachs.

Housebuilders were among the largest fallers on the index as the prospect of higher interest rates raised fears that the housing market would remain muted.

The FTSE 100’s biggest loser was online groacery giant Ocado, which dropped 6.2 per cent. It was followed by gambling firm Entain, which fell 5.2 per cent.

“This unexpected rise in inflation is a timely reminder that the struggle against soaring inflation is not yet over, particularly given stubbornly high core and services inflation,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

“While inflation may rise again in January, following the increase in Ofgem’s energy price cap, it should fall at a decent pace thereafter, aided by the expected drop in energy bills from April and lower food inflation.”