A US inflation measure closely watched by the Federal Reserve posted its biggest year-on-year jump since the 1990s in April, rising more than expected and fuelling concerns about price increases.

The commerce department’s core personal consumption expenditure index, which strips out volatile food and energy costs, rose 3.1 per cent last month compared to a year ago. The surge represents a sharp increase compared to the 1.9 per cent annual rise in March, and was higher than a consensus forecast estimating a 2.9 per cent jump.

On a monthly basis the core PCE index jumped 0.7 per cent last month, compared to 0.4 per cent in March.

This would bring the core PCE price index well above the Fed’s 2 per cent target, to levels that have not been recorded since the 1990s.

The surge in the PCE price index may raise new alarm about the US recovery overheating amid a burst of demand as the pandemic wanes. But Fed officials have signalled that they believe that the factors driving the change are mostly transient, such as heavy fiscal stimulus and supply-chain bottlenecks, and that inflation is likely to fall back later in the year. 

One of the biggest factors driving the year-on-year increase in reported inflation in April relates to so-called “base effects” — the comparison with 2020 readings that were exceedingly low during the first coronavirus lockdowns.

Since last year the Fed has adopted a more tolerant approach to inflation, striving to achieve moderately higher price rises compared to its target, in order to compensate for years of low inflation and push more forcefully for full employment.

But US central bank officials are also adamant that they are prepared to act if recorded inflation or inflation expectations appear to spiral out of control.

Including volatile energy and food price, the PCE price index rose by 3.6 per cent compared to April 2020, much faster than the 2.4 per cent rise in March.

The data was released in the same report that showed personal income dropping by 13.1 per cent in April, as stimulus payments began to fade, while consumption rose by 0.5 per cent.

Investors generally looked past the elevated inflation print, having already girded for a temporary bout of higher consumer price increases as the US economy recovers from the pandemic.

The $21tn market for US government debt steadied following the release, with yields on longer-dated Treasuries barely changed.

The benchmark 10-year bond, which influences borrowing costs worldwide, now trades at 1.61 per cent. It hovered around 0.9 per cent at the end of last year and reached a recent peak of 1.78 per cent in March.

Collin Martin, a fixed-income strategist at Charles Schwab, said the muted market reaction on Friday underscores investors’ belief that higher rates of inflation are likely to fade over time. 

“We are in the camp that April, May and June are likely to see very high numbers that will likely come down and prove to be transitory,” he said. “We don’t expect inflation to go back to the pre-pandemic levels of sub 2 per cent, and we think there are plenty of forces to keep us in the low-to-mid 2 per cent [range], but we are not expecting runaway inflation.”

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