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Inflation in eurozone sends stocks lower

Rising inflation in Europe and declining purchasing power for Americans sent stocks lower on both sides of the Atlantic yesterday in the last session of a particularly difficult third quarter.

The euro dropped against the dollar as official data showed a spike in eurozone inflation to 3.0 per cent in September, while the region’s unemployment rate was steady at 10 per cent in August.

At the closing bell, London’s FTSE-100 index slid 1.32 per cent to 5,128.48 points. In Frankfurt the DAX fell 2.44 per cent to 5,502.02 points and in Paris the CAC-40 dropped 1.51 per cent to 2,981.96 points.

Elsewhere in Europe, Milan fell 1.39 per cent, Madrid 0.54 per cent, Lisbon 1.25 per cent, Amsterdam by 1.34 per cent and Zurich by 1.37 per cent.

On Wall Street, the Dow Jones Industrial Average lost 0.38 per cent to 11,111.90 points in midday trade. The S&P 500 dropped 0.68 per cent to 1,152.58 points, and the tech-heavy Nasdaq fell 0.71 per cent to 2,463.19 points.

The falls came on US Commerce Department data that pointed to weakening consumer power as incomes fell by 0.1 per cent in August, the first decline in nearly two years, even as prices for goods picked up.

“It seems very unlikely that consumers can lead the economy to a faster recovery pace,” economists John Ryding and Conrad DeQuadros of RDQ Economics told clients in a briefing note.

In Asia, the main indices in Tokyo, Australia and South Korea closed flat. Hong Kong shed 2.32 per cent with the Hang Seng Index playing catch-up after being shut on Thursday.

In foreign exchange deals yesterday, the euro dropped to $1.3453 from $1.3586 in New York late on Thursday. The dollar rose to 77.11 yen from 76.79 yen on Thursday.

Sharply rising inflation across the eurozone was unexpected, creating a dilemma for European Central Bank chief Jean-Claude Trichet who chairs his final policy meeting next week.

Mr Trichet must now make a difficult call on whether to reduce interest rates to face a weak economy despite rising prices.

With firm hopes by investors that major central banks ease monetary policy, inflation creeping up in the eurozone is sure to disappoint as it probably makes a rate cut from the ECB less likely.

The much larger-than-expected jump in eurozone consumer inflation “wasn’t enough to stop the euro falling, despite the fact that it makes a rate cut next week much less likely. The surprise jump has been put down to the increase in Italian VAT from the austerity budget,” Michael Hewson at CMC Markets said.

Analysts were looking for an interest rate cut to counter slowing eurozone growth.

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