US inflation rose 4.2 per cent in April over its level a year ago, a bigger jump than economists had expected, fuelling concerns that the world’s largest economy is over heating.

The higher inflation reading reflects a combination of hefty fiscal support, supply bottlenecks and increased spending as economic activity picks up following the rollout of coronavirus vaccinations.

US equities dropped after the inflation report, with the S&P 500 down 1.4 per cent in afternoon trading in New York. The technology-heavy Nasdaq, whose companies are particularly sensitive to higher inflation and interest rates, fell about 2 per cent.

A sell-off in US government bonds also accelerated, sending the yield on the benchmark 10-year bond 0.06 percentage points higher to 1.68 per cent.

The increase came as the European Commission sharply raised its economic forecasts for the coming two years, with the accelerating vaccination campaign helping the eurozone recover from the pandemic.

The euro area will grow by 4.3 per cent this year and 4.4 per cent in 2022, Brussels said, compared with previous forecasts for 3.8 per cent growth in both years.

In the US, the 4.2 per cent jump in inflation is the biggest rise since 2008 and a significant leap compared with the 2.6 per cent reading in March.

The surge reflects the relatively low levels of inflation at the start of the coronavirus outbreak. It poses a challenge to US economic policymakers, both at the Federal Reserve and the Biden administration, who continue to pursue hefty monetary and fiscal stimulus to help the US recover from the pandemic.

In response to the data, the White House council of economic advisers said that the US economy was experiencing a “normalisation” of prices as it recovers from the pandemic. “There will be months that come in below or above expectations as strong demand meets recovering supply. Recovery from the pandemic will not be linear. The Council of Economic Advisers will continue to monitor the data as they come in,” it said.

Richard Clarida, the Fed’s vice-chair, said he was “surprised” by the significantly higher inflation reading, but he still expected inflation “to return to — or perhaps run somewhat above — our 2% longer-run goal in 2022 and 2023”.

If “demand relative to supply was excessive” and persistent and pushed up inflation” the Fed “would not hesitate to act and to use our tools to bring inflation back down,” he said.

Line chart of Consumer price index, change, %, year on year showing Inflation has picked up as the US recovers from the pandemic

Some Republicans seized on the data to stress that both the Biden administration and the Fed had underestimated the risk of higher inflation.

“With this morning’s Consumer Price Index release, it is clear that inflation is here,” Pat Toomey, the Republican senator from Pennsylvania, wrote on Twitter. “The Federal Reserve can no longer pretend this is a distant problem. It is time for the Fed to revisit its accommodative policy stance.”

However, many economists are not expecting a permanent surge in inflation.

“We share the Fed’s view that this isn’t the start of an upward inflationary spiral. We look for supply [and] demand imbalances to gradually be resolved and the pace of inflation to gradually cool heading into 2022,” said Kathy Bostjancic and Gregory Daco of Oxford Economics.

“The Fed is not going to panic after one startling CPI report, so you can expect to hear even more about transitory bottleneck inflation pressures over the next few weeks,” said Ian Shepherdson of Pantheon Macroeconomics. “But this report does mean that the first part of the higher inflation story — the reopening spike — is real. It’s no longer a forecast, and further hefty increases are coming.”

Fed officials have become more tolerant of inflation partly because consumer prices have so often hovered below the central bank’s 2 per cent target. Even with loose monetary policy they have struggled to get it to rise.

Despite the limited concern at the Fed and Treasury, alarm over higher inflation has become fairly widespread in US business and has been cited by investors as a reason for a sharp stock market sell-off this week.

Warren Buffett, chief executive of Berkshire Hathaway, said this month that executives at his company were seeing “very substantial” inflation. “People are raising prices to us, and it’s being accepted.”

Tyson Foods this week said it had raised prices substantially. “Overall, we’re seeing an accelerating inflationary environment that is creating a meaningful headwind for prepared foods in the back half of the year,” said Donnie King, its chief operating officer. “We’re seeing raw material costs up over 15 per cent as well as increases in logistics, packaging and labour.”

Additional reporting by Matthew Rocco and Colby Smith