Stocks retreat as US deflation fears grow

Shares turned lower in mid-afternoon deals as US data sparked new fears deflation could take hold across the Atlantic while growing fears about the level of Irish government debt also re-emerged.

In the US, the blue chip Dow Jones Industrial Average was down 11 points at 10,583 as investors weighed some stellar results from technology giants Oracle and Research in Motion against some weaker than expected core inflation data.

Consumer price inflation in the US was 0.3% in August. Excluding energy and food prices inflation was unchanged, lower than the 0.1% increase economists had been expecting.

Paul Ashworth, senior US economist at Capital Economics, said: 'If GDP growth remains as weak as we fear and the unemployment rate remains close to its current level, inflation will keep falling and eventually deflation, albeit probably a mild Japan-style one, will set in.'

Weaker than hoped for consumer confidence data, which showed confidence has fallen back to August 2009 levels, also weighed.

In the currency markets, the euro ticked lower against the dollar and the pound to $1.3054 and 83p respectively after an analyst report sparked fear that Ireland may need to seek overseas help to get its public finances in order.

One London based trader said: 'Indices have pared gains as fears grow that Ireland will default on its bank and sovereign debt. Irish CDSs have widened and the Euro has been pegged back.'

CDSs reflect the relative cost of insuring debt. 

Here the FTSE 100 had been falling from early morning highs above 5,600 as first profit-taking and then later worries about Irish government debt levels took their toll.

By mid-afternoon the blue chip index was down 15.44 points at 5524 points as strength in mining and technology stocks continued to limit the downside.