NEW YORK, United States (AFP) — Stock markets fell Friday, with Wall Street indexes retreating from record highs as a key United States (US) inflation reading accelerated, lowering the possibility of sustained interest rate cuts in the coming months.

Investors widely expect a cut next month to bolster the world’s largest economy after Federal Reserve chief Jerome Powell signalled last week the risks of labour market weakness.

But the personal consumption expenditures (PCE) price index held steady at 2.6 per cent in July, above the Fed’s two-per cent target, with the core reading that strips out food and energy accelerating slightly to 2.9 per cent.

“The bad news is, inflation is continuing to inch higher, which isn’t really the environment the Fed likely wants to cut in,” said Bret Kenwell, an analyst at eToro.

Although a September cut of 25 basis points is probably still on the cards, “it may be hard for them to move as quickly or aggressively as they’d like, with inflation moving higher,” he said.

The main US indexes fell ahead of the long Labour Day weekend after the Dow and S&P 500 closed at all-time highs on Thursday.

Wall Street will be closed on Monday for the holiday.

In Europe, German data showed that unemployment in Europe’s biggest economy topped three million in August for the first time in more than a decade.

Battered by high energy costs and fierce Chinese competition, German manufacturers were struggling even before US President Donald Trump erected new tariff walls.

Separate figures showed that German inflation rose in August for the first time this year, putting it at 2.2 per cent, which could lessen the chances for further European Central Bank rate cuts.

“As far as the European Central Bank is concerned, today’s German inflation data will catch the hawks’ attention, as it bolsters the argument for a high bar to yet another ECB rate cut,” said Carsten Brzeski, an economist at ING.

Inflation slowed in France and Italy this month, however, and held steady in Spain.

In Britain, an influential think tank said Friday that the Labour government could raise billions of pounds by imposing a windfall tax on banks in the United Kingdom (UK).

NatWest fell significantly on London’s top-tier FTSE 100 index, closing down 4.4 per cent, and Lloyds and Barclays also saw heavy selling.

The report by the Institute for Public Policy Research suggested that banks could be targeted in the Labour government’s autumn budget.

“Any such rumours are likely to have an exaggerated impact given the government’s obvious need to raise more income in an attempt to mitigate its financial difficulties,” said Richard Hunter, head of markets at Interactive Investor.

– Key figures at around 2035 GMT –

New York – Dow: DOWN 0.2 per cent at 45,544.88 points (close)

New York – S&P 500: DOWN 0.6 per cent at 6,460.26 (close)

New York – Nasdaq: DOWN 1.2 per cent at 21,455.55 (close)

London – FTSE 100: DOWN 0.3 per cent at 9,187.34 (close)

Paris – CAC 40: DOWN 0.8 per cent at 7,703.90 (close)

Frankfurt – DAX: DOWN 0.6 per cent at 23,902.21 (close)

Tokyo – Nikkei 225: DOWN 0.3 per cent at 42,718.47 (close)

Hong Kong – Hang Seng Index: UP 0.3 per cent at 25,077.62 (close)

Shanghai – Composite: UP 0.4 per cent at 3,857.93 (close)

Euro/dollar: UP at 1.1693 from $1.1680 on Thursday

Pound/dollar: DOWN at $1.3507 at from $1.3508

Dollar/yen: UP at 147.01 yen from 146.97 yen

Euro/pound: UP at 86.56 at from 86.46 pence

West Texas Intermediate: DOWN 0.9 per cent at $64.01 per barrel

Brent North Sea Crude: DOWN 0.7 per cent at $68.12 per barrel