By Johann M Cherian and Bansari Mayur Kamdar
(Reuters) -UK's FTSE 100 logged its worst daily performance in seven weeks on Wednesday as warnings of even higher inflation in the coming months raised fears of a deep recession in Britain.
The FTSE 100 closed down 1.1% and clocked a monthly decline of almost 2% in a brutal August that saw homebuilders, automakers and retailers take the biggest hit.
Inflation is running at a 40-year high of over 10% and with energy bills set to jump 80% from October, it is expected to rise much further. Goldman Sachs warned earlier this week that inflation in Britain could exceed 20% early next year.
"When we look at some of these inflation indicators, it is obviously deeply concerning because it all feeds into the idea the Bank of England has a lot more to do, which is going to compound the pressure on the economy and it is going to be harder to ultimately get under control," said Craig Erlam, senior market analyst at OANDA.
The Bank of England will deliver another bumper 50 basis point (bps) increase to interest rates next month, and then slow the pace to a more regular 25 basis point rise in November before pausing, a Reuters poll forecast.
Meanwhile, Britain's impending new prime minister - set to be either Foreign Secretary Liz Truss or former finance minister Rishi Sunak - will be announced on Sept. 5, with polls indicating Truss as a clear frontrunner.
The two candidates have clashed over how to respond to soaring energy prices, with Truss initially saying she would rather cut taxes than give "handouts".
The domestically focused mid-cap index, which has far underperformed its international peer this year, slid 0.5% and logged monthly losses of 5.4%.
Confidence among British businesses has sunk to its lowest since March 2021 as companies worry about fast-rising inflation, according to a survey, which also showed pay pressures stabilising after a recent rise.
(Reporting by Bansari Mayur Kamdar, Johann M Cherian and Aniruddha Ghosh in Bengaluru; Editing by Krishna Chandra Eluri and Bernadette Baum)