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A U.S. inflation measure closely monitored by the Federal Reserve recorded its biggest year-over-year jump since the 1990s to April, rising more than expected and fueling concerns about price increases.
The Commerce Department’s core personal consumption spending index, which eliminates volatile food and energy costs, rose 3.1% last month compared to a year ago. The increase represents a sharp increase compared to the 1.9% annual increase in March, and was higher than the agreed forecast which estimated a jump of 2.9%.
The rise in the PCE price index may raise a new alarm about the US recovery overheating amid an explosion of demand as the pandemic subsides. But Fed officials have pointed this out who believe that the factors driving change are mostly transitory, such as strong fiscal stimulus and supply chain bottlenecks, and that inflation is likely to decline by the end of the year.
One of the most important factors driving the year-on-year rise in inflation reported in April relates to the so-called base effects: the comparison with 2020 readings that were extremely low during the first coronavirus blockages.
The latest inflation data came when the White House released its data complete budget proposal for fiscal year 2022, which reflects its commitment to be able to drag large amounts of new spending into the economy without causing a sustained jump in inflation.
The budget outlined more than $ 6 million in new spending to help strengthen the social safety net of middle- and lower-class households and invest in infrastructure upgrades. Plans would lead the U.S. debt-to-GDP ratio to rise to 117% of output over the next decade, with inflation measured by the consumer price index remaining relatively low, just above 2% during the next decade. next decade.
U.S. growth is expected to reach 5.2% this year before slowing in later years, according to the White House, a more conservative estimate compared to IMF and Fed projections.
Since last year, the Fed has taken a more inflation-tolerant approach, trying to achieve moderately higher price hikes compared to its target, in order to offset the years of low inflation and push harder the full occupation.
But U.S. central bank officials are also firm that they are willing to act if recorded inflation or inflation expectations appear to be out of control.
State Street senior macro strategist Marvin Loh said solid economic data, along with expanding asset values, provided fodder for the Fed to start considering reducing its policy support: a shift to the highs central bank officials I have recently been hugged.
“Now that we have the best feeling that the worst is behind us, we need to start thinking about renormalization,” he said.
Including energy and food prices, the PCE price index rose 3.6% compared to April 2020, much faster than the 2.4% increase in March.
The data was released in the same report which showed that personal income fell 13.1% in April as stimulus payments began to fade, while consumption rose 0.5%.
“The combination of falling real consumption and rising prices last month gives off a faint smell of stagflation,” said Paul Ashworth, chief U.S. economist at Capital Economics, who expects Treasury yields to pick up. its increase after a long time “according to the latest inflation data.
Investors generally looked beyond the high inflation data, as they had prepared for a temporary onslaught of higher consumer price increases as the U.S. economy recovered from the pandemic.
The $ 21 million U.S. government debt market stabilized after the launch, barely changing Treasury yields with a longer date.
The benchmark ten-year note, which influences debt costs worldwide, is now trading at 1.61%. It stood at around 0.9% at the end of last year and reached a recent peak of 1.78% in March.
Collin Martin, Charles Schwab’s fixed income strategist, said the market reaction off on Friday highlights investors ’belief that higher inflation rates are likely to fade over time.
“We are in the field that April, May and June are likely to see very high figures that are likely to go down and turn out to be transitory,” he said. “We do not expect inflation to rise to pre-pandemic levels below 2 percent, and we believe there is strength to keep us at 2 percent low or medium [range], but we do not expect runaway inflation “.
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