London Markets: Sterling rises after jump in U.K. inflation, leaning on FTSE 100

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U.K. stocks struggled for traction on Wednesday, after hotter-than-expected consumer prices drove up sterling, and as heavily weighted mining stocks took a hit from news of another step by China to cool commodity prices.

Investors were also focused on a Federal Reserve policy decision, which is due after London markets close.

The FTSE 100 index

was flat at 7,177.13, but the pound

climbed 0.2% against the dollar. A strong pound acts as a headwind for the many multinational companies that earn revenue overseas. Shares of heavily weighted British American Tobacco

dropped 1.2%.

Consumer prices climbed an annual 2.1% in May, which was above forecasts and surpassed the Bank of England’s 2% inflation target for the first time in two years.

George Buckley, chief U.K. and euro area economist at Nomura, said the data have prompted him to lift the bank’s fourth-quarter 2021 inflation forecast from 2.7% to 3.2%. He still doesn’t expect the higher rates and quantitative tightening until 2023 from the central bank.

“Clearly, a bout of above-target inflation presents risks to that view, but we think high inflation will be temporary as this year’s price rises give way to a sharper fall in inflation next year due to base effects. At the same time, we expect the BoE to be keen to protect what could prove to be a fragile recovery, with output well below its pre-pandemic path,” Buckley said in a note to clients.

Also proving a drag for the index were heavily weighted mining stocks. China’s state stockpiling body reportedly plans to release copper, aluminum, zinc and other metals reserves in batches in the near future to keep supply and prices stable. The National Food and Strategic Reserves Administration said those reserves would be released to metal processing and manufacturing companies.

July copper prices

fell 4% on Tuesday on fears of such a move, but were trading up 0.2% on Wednesday to $4.344 a pound. Miners were reflecting market jitters, with Glencore

stumbling 2.8%, Anglo American

and Antofagasta

down 2%, and Rio Tinto


off 1%.

Surging commodity prices have come as major economies rebound from the COVID-19 pandemic, with the U.S. and China out in front. Wednesday also revealed a batch of fresh China economic data, including retail sales and industrial production, both of which showed a slowdown from the previous month on an annual basis.

“With China having driven much of the upside seen in global commodity prices over the past year, their recent efforts aimed at easing the price pressures have clearly caused major rippled throughout the sector,” said Joshua Mahony, senior market analyst at IG. “The declines in Chinese industrial production seen today highlights the pressure put on economic growth by rising input prices,” he added.