PARIS: European shares dropped on Wednesday as strong underlying inflation in the US indicated that the Federal Reserve may need to keep interest rates elevated for a while, while a slew of upbeat corporate earnings helped stave off a steeper fall.
The pan-European STOXX 600 index closed 0.4% lower.
The benchmark index briefly turned positive earlier in the day following the release of the data that showed headline CPI in the world’s largest economy eased on an annual basis in April.
However, a deeper dive into the report showed underlying inflation in the US remained strong.
“Inflation will fail to settle at levels where the Fed is comfortable with (at 2%),” said Andrea Cicione, head of research at TS Lombard.
“Without a recession, inflation will not fall towards the Fed’s target, which means that the Fed could be pausing now, but eventually they will start to hike again to bring inflation towards target.” Investors also kept a tab on talks on raising the US federal government’s $31.4 trillion debt ceiling that entered a new phase on Wednesday, with the Treasury Department warning of a default as soon as June 1.
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