Europe close: Stocks jump as UK inflation undershoots

European shares extended gains on Wednesday as a surprise fall in UK inflation raised hopes the Bank of England may pause its rate rate hike programme when it meets on Thursday, while a rise in eurozone industrial production also boosted sentiment.

The pan-European Stoxx 600 index was up 0.91% to 460.66, alongside a 1.64% jump for Italy's FTSE Mib to 29,229.30, while the German Dax added 0.75% to 15,781.59.

UK inflation unexpectedly fell in August, with the core measure of price growth slowing dramatically, adding to hopes that the Bank of England's next interest-rate hike could be its final one in the current cycle.

The year-on-year change in the consumer price index (CPI) eased to 6.7% last month, from 6.8% in July and surprising economists who had forecast a slight tick-up to 7.1%.

This was the lowest level for annualised inflation since February 2022, partly due to a slowdown in food and non-alcoholic beverage price growth.

Core inflation, which excludes the more volatile items like food and energy, dropped to 6.2% in August, from 6.9% the month before and well below the 6.8% reading expected.

“Just like that what had seemed like a sure thing is cast into doubt. Moments after the shock inflation number was released, the market expectation of a Bank of England rate rise began to plummet," said AJ Bell analyst Danni Hewson.

“Within half an hour what had been a pretty nailed on 80% expectation of another quarter percentage point hike fell to a 50/50 chance that MPC members would vote to press pause on this rate hiking cycle, at least for now."

“After a slew of profit warnings from UK PLC yesterday and a GDP figure that sat badly for the UK economy, the news that inflation has continued to cool is likely give policy makers enough wiggle room to adopt a wait and see strategy."

Meanwhile, eurozone construction output nudged higher in July, official data showed, following gains in the bloc’s major economies.

According to Eurostat, the European Union’s statistics office, seasonally-adjusted production in the construction sector rose by 0.8%, reversing much of June’s 1.2% fall. Across the wider bloc, production rose 0.7% compared to a 1.0% decline in June.

Year-on-year, production increased by 1.0% in the Eurozone in July and by 0.9% across the EU.

In equity news, shares in UK housebuilders jumped on the inflation news, on hopes that mortgage costs would not rise further. Barratt, Persimmon, Bellway and Taylor Wimpey were all higher, along with developers British Land and Berkeley.

Pearson shares fell as the educational publisher's CEO Andy Bird said he was retiring next year to be replaced by Omar Abbosh.