The dollar climbed and US stocks oscillated on Wednesday following stronger than expected retail sales figures, the latest in a string of economic data that has fuelled investor bets that the Federal Reserve will have to raise interest rates further to curb inflation.

Wall Street’s benchmark S&P 500 was flat in afternoon trading in New York, flipping between gains and losses after data showed retail sales rose 3 per cent month on month in January, far more than the 1.8 per cent increase expected by economists polled by Reuters. The tech-heavy Nasdaq Composite increased 0.5 per cent.

Interest rate-sensitive short-term US government debt sold off following the retail figures, but flattened later in the session. The 10-year Treasury yield added 0.05 percentage points to 3.81 per cent as the price of the debt fell.

The prospect of higher rates helped boost the dollar, which was up 0.7 per cent against a basket of rival currencies.

Wednesday’s “massive” retail sales figures may have been partly related to warm weather but suggest the US economy “will easily avoid a recession” in the first quarter, said Paul Ashworth, chief North America economist at Capital Economics.

“The stronger labour market means paycheques rather than rainy-day savings can fuel spending,” Wells Fargo economists wrote on Wednesday.

“With consumers not overly concerned that inflation will persist or that the labour market is rapidly deteriorating, we see little cause for them to halt spending in the near term.”

The Empire State Manufacturing Survey, meanwhile, rose to minus 5.8 in February from a reading of minus 32.9 the previous month, with economists having forecast a more modest rise to minus 18.

Wednesday’s data followed higher than expected US inflation figures released on Tuesday. US consumer prices rose 6.4 per cent year on year in January, more than the 6.2 per cent increase expected. Annual core inflation, which strips out volatile food and energy prices, was also slightly above expectations.

The signs of persistent inflationary pressures reverberated throughout financial markets, raising the level at which investors expect US rates to peak and lowering the number of rate cuts forecast for later this year. Pricing in the futures market shows traders expect rates to peak at 5.27 per cent in July, up from 5.18 per cent before the data was released.

“[A] slowing of inflation progress . . . means we get to the 2 per cent target further out in the future, which means the [Federal Reserve] will stay higher for even longer,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “There is no urgency for the Fed to cut rates if inflation is taking longer to get down where the Fed wants it.”

Elsewhere, sterling weakened and UK government bonds rallied after UK inflation fell more than forecast to a five-month low, raising the chances that interest-rate rises would pause sooner than investors had expected.

Data on Wednesday showed UK inflation slowed to 10.1 per cent in January, more than expected. Core inflation fell to 5.8 per cent, much lower than the 6.2 per cent forecast by economists. London’s FTSE 100 touched the 8,000-point mark for the first time, moderating later to close 0.6 per cent higher. Sterling shed 1.2 per cent against the dollar to $1.20, its lowest level since early January.

The inflation figures have boosted expectations that the Bank of England will pause its monetary tightening campaign later in the spring, and come as the UK teeters on the edge of recession. The UK economy stagnated in the final quarter of 2022 after contracting in the previous three months.

Having risen steadily since early February, two-year gilt yields fell 0.03 percentage points to 3.77 per cent following Wednesday’s inflation figures, while 10-year gilt yields dipped 0.04 percentage points to 3.48 per cent. Bond yields move inversely to prices.

The BoE this month increased interest rates by half a percentage point to a 15-year high of 4 per cent, but it hinted February’s increase might be its last.

In Asia, Hong Kong’s Hang Seng index shed 1.4 per cent, China’s CSI 300 lost 0.5 per cent, Japan’s Topix declined 0.3 per cent and South Korea’s Kospi shed 1.5 per cent.

Europe’s region-wide Stoxx 600 added 0.4 per cent and Germany’s Dax rose 0.8 per cent.