Consumer prices jumped at the fastest pace in more than a decade in April, surprising economists and intensifying a debate on Wall Street and in Washington over whether inflation might reach levels that would squeeze households and ultimately undermine the recovery.
Investors and politicians are worried that prices will keep climbing — potentially causing the Federal Reserve to lift interest rates sharply. That could slow economic growth and send stock prices plummeting. But some economists and central bank officials said the jump in the Consumer Price Index reflected pandemic-driven trends that would most likely prove temporary.
Stocks slumped more than 2 percent on Wednesday, their biggest decline since late February.
Hanging over the debate is America’s inflationary experience in the 1960s and 1970s, when big government spending, an oil crisis, a slow-moving Fed and the final end of the gold standard converged to send price gains to double-digit heights. The central bank got things under control only by lifting interest rates to punishing levels, at a grave cost to the housing market and ultimately the job market.
Few analysts expect a return to such huge price gains, in part because the Fed has pledged to act to keep inflation under control. But if officials are prodded to withdraw economic support quickly in order to prevent another “Great Inflation,” it could spur a downturn, as sudden Fed changes have done in the past.
Yet many economists, including advisers to the White House and Fed officials themselves, played down the concern that the inflation gains will last past the end of this year. The specifics of the C.P.I. report instead backed up the Fed’s belief that the rapid price increases will probably fade with time, several said, because they trace back to the economy’s reopening from the pandemic.
“This is one data point,” Richard H. Clarida, the Fed’s vice chair, cautioned shortly after the data release, noting that it might take time for supply to catch up with demand as the economy reopens.
Even so, he struck a somewhat cautious tone, acknowledging that the number came as a “surprise” and saying the Fed will remain watchful to make sure the increase is temporary. The closely monitored Consumer Price Index climbed 4.2 percent from a year earlier, its fastest pace since 2008, the Labor Department said. Economists had expected a smaller 3.6 percent gain.
Prices for used cars, plane tickets and furniture are all rising as the economy reopens, contributing to the increase. The jump also reflected the fact that prices tumbled a year ago when state and local governments instituted stay-at-home orders, causing spending to sharply slump. The report’s details told a story of resurging demand while supply is constrained, and at an uncertain and volatile juncture — the economy has never reopened from a pandemic shutdown before.
But the report fueled investor concerns that price gains might be more pronounced and lasting than the Fed anticipates. Financial markets reacted sourly: Yields on government bonds jumped and stock prices tumbled for the third day in a row.
“There is a lot of concern that the Fed is behind the curve on this, that prices and wages are going up,” said Alan Detmeister, a former central bank inflation forecaster who now works at the bank U.B.S. Mr. Detmeister said he too expected the price increases would fade, but noted that the larger-than-expected April gain “feeds into that narrative.”
The price index also climbed notably between March and April. The C.P.I.’s core index, which strips out volatile food and energy prices, rose 0.9 percent over the month — its biggest monthly increase since April 1982.
The data gave Republicans a new opening to attack President Biden’s handling of the economic recovery. They have repeatedly warned that trillions of dollars of spending by the Biden administration risked overheating the economy.
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Senator Rick Scott, Republican of Florida, said in a release on Wednesday that the report “further confirms our fears” and that “President Biden’s silence on inflation is deafening.”
President Biden’s economic advisers saw little evidence in Wednesday’s report to change their view that temporary factors are driving inflation, including supply bottlenecks in industries like motor vehicle production and resurgent consumer demand for travel and dining out. They continue to believe that there is little threat of a sustained inflation spiral that could stunt the recovery.
A senior administration official said on Wednesday that the details of the Labor Department report showed evidence of supply-chain disruptions — particularly in used cars — along with pent-up consumer demand in the tourism and hospitality industries as more Americans become vaccinated.
Wall Street was less convinced. The S&P 500’s loss on Wednesday, its sharpest daily drop since Feb. 25, added to declines earlier in the week that have left the index down 4 percent since last Friday.
Trading in the futures market suggested that investors slightly shifted their expectations for when the Fed would begin lifting interest rates, pulling the first increase forward to the end of 2022, rather than the start of 2023, said John Briggs, global head of desk strategy at NatWest Markets in Stamford, Conn.
The Fed has kept its benchmark interest rate near zero since March 2020 and has been buying $120 billion in bonds each month, policies meant to keep many types of credit cheap and foster a stronger economic rebound from the pandemic recession.
Officials have said they want to see “substantial” progress toward their goals, which are to hit 2 percent inflation on average over time and to foster maximum employment, before dialing back bond purchases. They want evidence that they have achieved those goals before they lift interest rates.
Mr. Clarida made it clear that he is not yet ready to dial back support — especially after an employment report last week showed that job gains slowed sharply in April, vastly disappointing economists’ expectations.
“We have not made substantial further progress toward our labor market objective,” Mr. Clarida said Wednesday, speaking to business economists on a webcast.
The demand surge that seemed to drive the monthly price gain in April — the one pushing travel costs higher, for instance — struck some economists as being exactly the kind of reopening bump that the Fed has so often said it can tolerate.
“It shows the services side of the economy is reawakening,” said Sarah House, a senior economist at Wells Fargo. “This is largely what the Fed expected, it’s just coming faster and with larger force.”
The Fed defines its inflation target using a separate measure, the Personal Consumption Expenditure index. That metric relies partly on data from the C.P.I. and is also expected to move above the central bank’s goal of 2 percent annual inflation, on average, over the coming months.
For much of the past decade, inflation has actually been too low, rather than too high — risking a downward spiral, and robbing central bankers of room to bolster the economy in bad times by cutting interest rates, which include inflation. As a result, the Fed last year redefined its 2 percent inflation target to make it clear that it will aim for periods of slightly faster price gains to make up for months of slow ones.
Fed officials have been clear in recent weeks that as inflation pops, they need to focus on both risks: that it might take off, but also that it might sink back down after a 2021 reopening jump.
“The Fed has a fundamentally different framework. I mean, we cannot apply the playbook of the Fed in the previous recovery to what’s happening now,” said Jean Boivin, head of the BlackRock Investment Institute. “I think each time we get a number that surprises in the upside, we get an extrapolation, too much extrapolation, into a Fed tightening coming sooner.”
Matt Phillips, Jim Tankersley and Ella Koeze contributed reporting.