London close: Stocks fall sharply; shop price inflation hits fresh high

London stocks ended firmly in the red on Wednesday as investors continued to fret over the prospect of higher rates and an economic slowdown.

The FTSE 100 closed down 1.1% at 7,284.15.

Oanda market analyst Craig Erlam said conditions remain choppy in the aftermath of Jackson Hole last week.

"There's clearly a lack of conviction in the markets following a lot of hawkish central bank commentary in recent days. The narrative that investors want to believe is that inflation has peaked and is falling in the US and that a soft landing is plausible. That doesn't necessarily align with what we're hearing.

"Add to that the increasingly hawkish language from other central banks amid severe economic headwinds and the reality of the situation is seemingly becoming impossible to ignore. With 75 basis point hikes now on the table for the US, EU and UK next month, among others, it may not be entirely surprising that investors are taking a more cautious stance."

Erlam argued that the latest eurozone inflation data released earlier "won't have hurt the odds of a 75-basis point hike, that's for sure". Inflation in the bloc rose to a fresh record of 9.1% in August, from 8.9% in July.

On home shores, figures released by the British Retail Consortium and NielsenIQ showed that shop price inflation hit a new high in August as the war in Ukraine pushed up the cost of food.

Shop price inflation jumped to 5.1% from 4.1% in July, marking a new record for the measure since the index started in 2005. Meanwhile, fresh food price inflation rose to 10.5% in August from 8% a month earlier, hitting its highest level since the global financial crisis in September 2008.

BRC chief executive Helen Dickinson said: "Mounting cost pressures up and down supply chains meant shop price inflation hit a new high in August. The war in Ukraine, and consequent rise in the price of animal feed, fertiliser, wheat and vegetable oils continued to push up food prices. Fresh food inflation in particular, surged to its highest level since 2008, and products such as milk, margarine and crisps saw the biggest rises.

"The rise in shop prices is playing into wider UK inflation, which some analysts are predicting could top 18% in 2023. The situation is bleak for both consumers and retailers, but retail businesses will remain committed to supporting their customers through offering discounts to vulnerable groups, expanding value ranges, fixing prices of essentials, and raising staff pay. However, as retailers also grapple with growing cost pressures, there is only so much they can shoulder."

In equity markets, Shell, BP and Tullow Oil gushed lower as oil prices fell.

SSE and National Grid also lost ground. CMC Markets analyst Michael Hewson said concerns about a windfall tax on some of their profits have resurfaced.

"Due to the way that electricity prices are linked to the gas price, some companies are reaping huge profits given their electricity is being generated by renewables, which has a lower cost of generation. This is giving these companies a nice windfall, which governments are starting to cast an envious eye over," he said.

On the upside, WH Smith gained as Berenberg encouraged investors to "revisit the story" ahead of its trading update next week, "given the company's defensive growth profile and its limited exposure to cost inflation".

Outside the FTSE 350, Shoe Zone rallied after it upgraded its full-year profit guidance, highlighting strong demand for summer and back to school products in August.

Cake Box shares tumbled, however, after the cream cakes retailer warned on profits, citing a "significantly more challenging" trading environment.

Market Movers

FTSE 100 (UKX) 7,284.15 -1.05%
FTSE 250 (MCX) 19,063.75 -0.45%
techMARK (TASX) 4,312.30 -0.57%

FTSE 100 - Risers

International Consolidated Airlines Group SA (CDI) (IAG) 108.22p 1.73%
Flutter Entertainment (CDI) (FLTR) 10,815.00p 1.60%
Endeavour Mining (EDV) 1,697.00p 1.45%
Harbour Energy (HBR) 477.00p 1.32%
Imperial Brands (IMB) 1,896.50p 0.99%
Phoenix Group Holdings (PHNX) 602.40p 0.84%
Smurfit Kappa Group (CDI) (SKG) 2,894.00p 0.84%
Ocado Group (OCDO) 726.00p 0.83%
Reckitt Benckiser Group (RKT) 6,648.00p 0.79%
Aveva Group (AVV) 2,800.00p 0.72%

FTSE 100 - Fallers

National Grid (NG.) 1,078.00p -4.14%
SSE (SSE) 1,652.50p -3.42%
AstraZeneca (AZN) 10,644.00p -2.97%
Hargreaves Lansdown (HL.) 817.60p -2.29%
Glencore (GLEN) 473.30p -2.20%
Bunzl (BNZL) 2,861.00p -2.15%
SEGRO (SGRO) 943.00p -2.12%
Shell (SHEL) 2,290.00p -2.12%
Airtel Africa (AAF) 132.30p -1.78%
BAE Systems (BA.) 776.20p -1.75%

FTSE 250 - Risers

Lancashire Holdings Limited (LRE) 493.80p 3.18%
TI Fluid Systems (TIFS) 146.60p 2.66%
Beazley (BEZ) 583.50p 2.64%
Hammerson (HMSO) 22.14p 2.20%
WH Smith (SMWH) 1,429.50p 2.11%
Trainline (TRN) 345.70p 1.98%
Pennon Group (PNN) 934.00p 1.97%
FirstGroup (FGP) 115.10p 1.95%
Schroder Asia Pacific Fund (SDP) 526.00p 1.94%
Biffa (BIFF) 401.40p 1.87%

FTSE 250 - Fallers

Tullow Oil (TLW) 48.60p -6.18%
Drax Group (DRX) 636.00p -5.15%
Baltic Classifieds Group (BCG) 144.80p -4.49%
Energean (ENOG) 1,294.00p -4.29%
LondonMetric Property (LMP) 217.20p -3.64%
Tritax Big Box Reit (BBOX) 166.50p -3.31%
Apax Global Alpha Limited (APAX) 177.40p -3.17%
Indivior (INDV) 289.40p -3.08%
ASOS (ASC) 700.50p -3.07%
F&C Investment Trust (FCIT) 878.00p -2.90%