Jump in inflation is nasty surprise for City markets

CITY markets today took fright at the first increase in the annual rate of inflation since February.

- Jonathan Prynn & Jitendra Joshi

The FTSE 100 index of leading shares tumbled 124.47 points, or 1.6%, to 7,433.87 by mid-morning after the Office for National Statistics (ONS) said the headline measure of prices went up to 4% in December from 3.9% in November.

The rise caught City analysts on the hop. Most had forecast another small fall in the Consumer Prices Index (CPI) to 3.8% or 3.7%.

The gilts market also showed its displeasure, with the yield on the two-year bond jumping around 11 basis points to 4.276%.

Sarah Coles, head of personal finance at asset managers Hargreaves Lansdown, said: "This bounce in inflation isn't a massive movement, and isn't dramatically different to the forecasts, but it's a surprise, and the markets really don't like surprises. It's a salient reminder that inflation is likely to trend downwards from here, but not particularly fast, and with plenty of bumps along the way.