UK stocks fall as inflation returns to 40-year high; banks under pressure

By Sruthi Shankar and Johann M Cherian

(Reuters) -UK stock indexes closed lower on Wednesday after data showed consumer prices returned to a 40-year high in September, while banking stocks were hit by reports of windfall taxes.

The blue-chip FTSE 100 index slipped 0.2% after a four-day run of gains following the historic reversal of the new government's failed fiscal plan.

The biggest jump in food prices since 1980 pushed British inflation back into double digits in September, matching a 40-year high hit in July, dealing a fresh blow to households grappling with the cost-of-living crisis.

"It has been a measured response both in the FX and bond market so far," said Alan Custis, head of UK equities at Lazard Asset Management.

"The market is still thinking somewhere between a 75 and 100 bps rate hike in November probably on the back of this print, and a lot of that is already baked into the market."

Banks, down 0.3%, also dragged the indexes lower after a media report said UK Chancellor Jeremy Hunt was preparing to raid their profits as the government seeks new sources of cash to shore up its finances.

Consumer stocks such as Flutter Entertainment Plc, down 3%, and Kingfisher Plc, down 5%, added to the dour sentiment.

"Businesses are also worried. They are fighting their own cost battles and dealing with falling consumer confidence and dwindling discretionary spend," said Danni Hewson, financial analyst at AJ Bell.

"They are also eyeing today's inflation number with some trepidation and considering what it is going to do to their business rate costs."

The domestically exposed FTSE 250 index dropped 1.6% after closing at a near two-week high in the previous session.

Online fashion retailer ASOS jumped 12.2% after it vowed to overhaul its business model. The economic slowdown combined with a string of operational problems has been hammering its profits.

(Reporting by Sruthi Shankar and Johann M Cherian in Bengaluru; Editing by Subhranshu Sahu, Shinjini Ganguli and Vinay Dwivedi)