Markets jumping the gun on inflation fears: Economists

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Chris Williamson, chief economist at Markit, said: "UK inflation came in higher than expected in January, adding further pressure for policymakers to hike interest rates again, possibly as soon as May".

Figures released Wednesday by the U.S. Labor Department revealed that the Consumer Price Index rose 0.5% last month against projections of a 0.3 percent increase. Economists expect January CPI to rise 1.9% year-over-year.

After opening lower, the Dow, S&P 500 and Nasdaq were higher by mid-afternoon.

As per data released by the Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation, food inflation saw a marginal decline to 4.70 percent in January from 4.96 percent in December a year ago.

The Federal Reserve uses higher rates to curb inflation and has said it expects to raise rates this year.

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Luke Bartholomew, investment strategist at Aberdeen Standard Investments, said: "There is a risk that this could pour fuel on the fire of last week's market sell off".

"Of itself, inflation, particularly driven by higher demand, is not necessarily negative for equities", said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey. That nervousness is not going away.

The 1.8 percent increase in core prices is still below the Fed's 2 percent target.

"While the door remains open for a May interest rate hike, the Bank of England will likely need to see indicators of the economy's health improve to be sufficiently reassured that the economy is ready for another rise in borrowing costs".

The recently announced fiscal stimulus package comes at a time where the labour market is already very tight, which coupled with a weaker dollar, could lead to higher levels of inflation in the future.

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Britain's annual inflation rate remained at 3.0 per cent in January, holding near to a six-year peak, official data showed yesterday.

The renewed signs of building inflationary pressure in the USA economy put Wall Street on alert, with indications from pre-market trading showing a steep fall is likely as U.S. markets open.

Inflation remained unchanged at 3% last month adding further pressure on the Bank of England for an interest rate rise. Unfortunately this was not to be the case. "It's the market's job to adjust to the backdrop of interest rates".

New data pointing to price and wage increases suggest the dynamics could be changing.

Including all items, CPI rose 2.1% over the prior year in January, more than the 1.9% that was expected by economists.

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