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 with a year ago. The surge represents a sharp increase compared with the 1.9 per cent annual rise in March, and was higher than a consensus forecast estimating a 2.9 per cent jump.

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.

The latest inflation data came as the White House released its full budget proposal for the 2022 fiscal year, reflecting its bet that it can plough huge amounts of new spending into the economy without stoking a sustained jump in inflation.

The budget outlined more than $6tn in new spending to help strengthen the social safety net for low and middle-class households and invest in infrastructure upgrades. The plans would lead the US’s debt-to-GDP ratio to rise to 117 per cent of output over the coming decade, with inflation as measured by the consumer price index remaining relatively tame, at just above 2 per cent over the next decade.

US growth is expected to reach 5.2 per cent this year before slowing down in subsequent years, according to the White House, a more conservative estimate compared to IMF and Fed projections.

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.

Marvin Loh, senior global macro strategist at State Street, said recently robust economic data alongside booming asset values provided fodder for the Fed to begin considering the reduction of its policy support — a shift top officials at the central bank have recently embraced.

“Now that we have a better sense that the worst is behind us, we need to start thinking about renormalisation,” he said.

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

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

“The combination of falling real consumption and soaring prices last month gives off a faint whiff of stagflation,” said Paul Ashworth, chief US economist at Capital Economics, which expects Treasury yields to “resume their rise before long” based on the latest inflation data.

Investors generally looked past the elevated inflation data, 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 note, 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.”