UK stocks drop over 1% as inflation worries weigh; Tesco jumps

London's blue-chip stocks fell on Wednesday, pressured by fears of higher inflation, while supermarket retailer Tesco topped the index on raising its annual outlook and strong first-half results.

The FTSE 100 index eased 1.2%, recording its worst session since August, weighed by energy and mining stocks, both down 2.6% and 1.7% respectively.

A recent survey found that more British manufacturers plan to raise their prices than at any other point in the past three decades, as cost pressures continue to build.

Inflation fears rising on the back of soaring energy costs, supply side and labour shortages have weighed on equities, as central banks look to pull back their pandemic era monetary support and hike rates to relieve cost pressures.

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"There's a big concern over increasing inflationary pressures coming at the same time of evidence that the UK recovery is slowing, and fears of stagflation are understandably growing too," said Stuart Cole, head of macro economics at Equiti Capital.

Banking stocks gained 1.0% after bond yields surged past 1.1%, the highest level since the spring of 2019, in signs of rising inflationary pressures.

The FTSE 100 has recovered around 40% from its pandemic lows hit in March 2020, and around 8% so far this year on rebounding optimism and supportive monetary policies.

HSBC Holdings led the pack after UBS raised its price target and upgraded the stock to "buy" from "neutral".

The domestically focused mid-cap index fell 1.4% to a near three-month low, with consumer discretionary stocks leading declines, after Barclays downgraded the sub-index to "underweight".

Tesco rose 5.9% after raising its full-year outlook following strong profit in the first half results.

Global recruitment firm PageGroup climbed 8.3% after it raised its profit forecast.

Tobacco group Imperial Brands fell 3.5%, although it said it was on track to meet its full-year operating profit forecast.