However, Michael Pearce at Capital Economics reckons that the Fed will look through this spike in ‘transitory’ inflation.

We doubt this report will change Fed officials’ view that those pressures are “largely transitory”. It’s just that there’s a lot more “transitory” than they were expecting.

The rise in airfares and hotel prices is so far simply reversing the sharp declines in prices seen earlier in the pandemic. But car rental prices have surged well above pre-pandemic levels, reflecting limited supply as rental agencies slashed fleet numbers last year. Depending on the strength of pent-up demand for leisure and travel, we could see similar surges in prices in other categories over the coming months.

There were also clear signs that supply shortages are putting intense upward pressure on goods prices, with used auto prices up by 10% m/m, mirroring the leap in wholesale prices reported over recent months. Automakers also face intense inventory pressure, but new auto prices rose by a more modest 0.5% in April.

Those are all scary numbers that will make the Fed uncomfortable, but the more muted gains in the cyclical components of CPI support Fed officials’ argument that the surge in inflation in April will be largely transitory. Rents rose by 0.2% and are up by 2.2% in 3-month annualised terms. Owners’ equivalent rent prices are up by 2.8% on the same basis, which is still below the 3%+ rates recorded pre-pandemic.

We now expect headline inflation to peak at close to 5% over the coming months and remain above 4% for most of the year, while core inflation will hit 3.5%, and average 2.7% over 2021. With employment still more than 8 million short of its pre-pandemic level, however, we expect the Fed to maintain its dovish line, even as inflation gains broaden out over the coming months.

Alright, not to the moon, but US inflation surged higher in April, primarily on the back of higher used car prices, says James Knightley, chief international economist at ING. He says this means that the Federal Reserve could raise interest rates a year earlier than expected, in early 2023.

Troublingly, there is evidence of broadening price pressures too. We increasingly doubt the Fed’s position that this is transitory and think they will end up hiking rates far sooner than 2024.

We’ve been warning about the prospect of higher for longer inflation in the US for many months, but even we hadn’t predicted this. Headline inflation jumped 0.8% month-on-month versus the 0.2% consensus while the core (ex food and energy) component rose 0.9% versus the 0.3% forecast.

This is the highest headline month on month reading since September 2009 and the highest core reading since 1981. It leaves the annual rates of inflation at 4.2% and 3% respectively.

The key reason is that the stimulus fuelled economy is booming. We are forecasting output will end the year higher than it would have done if there had been no pandemic and the economy had instead continued along its 2014-19 trend. However, the pandemic has led to scarring in the economy that means we are concerned that supply capacity won’t be able to keep pace with this demand.

With the economy roaring back, jobs returning and inflation likely to remain higher for longer we continue to see the risks skewed towards an earlier interest rate rise – 1Q23 – than the Federal Reserve is currently projecting – early 2024.

Wall Street has fallen at the open after the jump in US inflation to the highest rate since 2008.

• Dow Jones down 135 points, or 0.4%, at 34,134
• S&P 500 down 28 points, or 0.7%, at 4,123
• Nadaq down 174 points, or 1.3%, at 13,214

Core inflation has also picked up in the US, as briefly touched on earlier. Excluding food and energy, US consumer prices rose 0.9% in April from the month before, the biggest monthly increase since April 1982, taking the annual rate to 3%.

This is clearly stoking inflation fears around the world, with global bond yields soaring.

European stock markets are holding on to their gains, despite the jump in US inflation.

• UK’s FTSE 100 up 0.7%
• Germany’s Dax up 0.25%
• France’s CAC and Italy’s FTSE MiB flat

Let’s wait and see what happens when Wall Street opens. We are expecting further chunky losses...

Daniele Antonucci, chief economist & macro strategist at Quintet Private Bank, says today’s upside surprise in US consumer price inflation follows several other higher-than-expected increases, from China’s producer prices to Germany’s wholesale prices.

Markets appear somewhat nervous as more and more statistical releases suggest rising inflation. Our view is that inflation is rising because of transitory factors, such as supply bottlenecks.

Central banks – including the Fed – have communicated, and quite clearly, that they are aware of such trends and consider these spikes as transitory. Our own analysis supports this view too, and suggests that what’s boosting inflation is the combination of base effects, the feed-through of commodity price increases and various input shortages.

Conversely, we don’t see the strength in wage growth or the tightness in labour markets and in factory utilisation rates that are normally associated with protracted inflation spikes. This is why we expect inflation to peak over the next few months and to slow again in the second half of the year, eventually getting back to central banks’ targets.

Even though the inflation pickup was expected, most forecasts didn’t foresee such a big jump. It’s fair to say that some of the key inflation indicators have tended to rise more than the consensus had envisaged recently. This is what appears to have impacted stock markets over the past 48 hours, with tech shares once again retreating on fears that higher inflation may prompt central banks to hike rates sooner than expected.

Calibrating the magnitude of the inflation overshoot after a shock as big as the pandemic is going to be quite tough for market participants. This may raise volatility for a period of time. However, the major economies continue to recover, supported by reopening and stimulus.

Inflation was fuelled by higher prices for used cars and trucks, which rose 10% in April – the largest one-month increase since the series began in 1953 – taking the annual rate to 21%. Energy costs soared at an annual rate of 25.1%, and food prices rose 2.4%.

Seema Shah, chief strategist at the investment firm Principal Global Investors, says:

Another big miss in US data, but this time to the upside. US CPI inflation has come in meaningfully higher than expected and will further stoke concerns that the Fed has mis-read the inflation story.

But she is sanguine about the rise in inflation.

What have we really learnt today that we didn’t already know? Markets were already expecting a rise in inflation – the big question is how sticky that inflation is. That has not been answered today, nor will it be answered for several months. Nonetheless, risk markets will continue to be whipsawed by inflationary concerns over the coming months and investors would be wise to introduce some inflation protection into their portfolios.

Other bond yields are also rising, while the dollar has advanced, and US stock futures extended losses, pointing to a lower open on Wall Street. Germany’s 30-year bond yield has hit its highest level since June 2019 at 0.423%, while Italy’s 10-year bond yield jumped to 0.956%, the highest since September.

Spot gold has pared losses and turned positive and is now trading at $1,840 an ounce, up 0.18%.

The jump in inflation has sent US bond yields soaring. Markets have been fretting about higher inflation in recent days.

The jump in US inflation was bigger than Wall Street had expected (3.6%) and comes after March’s 2.6% rate. Core inflation rose to 3%, also higher than expected.

We could also see a shareholder revolt over pay plans for top bosses at Cineworld.

Britain’s largest cinema chain, which is set to begin reopening its 127 UK sites from next week as pandemic restrictions are lifted, has drafted a new remuneration policy that could see executives awarded more than £200m in shares, reports our media business correspondent Mark Sweney.

The oil giant BP is also holding its annual meeting today, and will come under pressure from climate campaigners. Our energy correspondent Jillian Ambrose reports:

BP chairman Helge Lund has called on shareholders to vote against a green activist resolution to strengthen its climate ambitions at the oil company’s remote AGM today.

Lund said the new resolution, proposed by shareholder activists at Follow This, would “necessitate changing the strategy we set only last year”, and added that it was “not in the interest of BP or its shareholders”.

BP set out plans to cut its emissions by growing its low-carbon investments eightfold by 2025, and tenfold by 2030, while cutting its fossil fuel output by 40% from 2019 levels. But Follow This has argued that the aims do not go far enough to cut emissions in line with the Paris Climate Agreement. The result of the vote is expected later this afternoon.

Industrial production edged higher in the eurozone at the end of the first quarter, but came in well below forecasts, according to Eurostat figures.

Output rose by just 0.1% in March from the previous month, and by 10.9% year-on-year. Analysts had been looking for a monthly gain of 0.8%. Across the wider EU, industrial production rose 0.6%, and by 11% year-on-year.

Germany, the eurozone’s largest economy, reported a 0.8% rise, while France posted a 0.7% gain. But Spain and Italy both recorded a 0.1% dip.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said:

We are a little bit surprised by these data.

The main source of the discrepancy seems to come from Spain, where Eurostat is incorporating a 0.1% month-to-month decline, in contrast to the national data sporting a 0.4% increase. In any case, the remaining details suggest that manufacturing firmed at the end of the first quarter, but also that the performance through the quarter as a whole was disappointing.

Base effects in the auto sector, strong surveys, and reopening point to an acceleration in the second quarter, in part as a lagged response to rising new orders, but we also have to take seriously the idea that the supply-side will remain a constraint to the headline.

The highest increase was seen in Denmark, where industrial production rose 4.9%. The largest decline was in Luxembourg, down 4.4%.

We’ve also had results from the world’s biggest catering company Compass Group.

Sales and profits have slumped at the catering firm Compass Group as the pandemic kept canteens closed at factories, offices and schools, reports Joanna Partridge.

Operating profit fell to £290m in the six months to the end of March, down 65% from £817m a year earlier, while revenue was down almost a third to £8.6bn.

However, the figures were an improvement on the previous six-month period, when Compass had to shut about half of its operations during the first Covid-19 lockdowns in spring 2020.

Compass said it had continued to retain almost all (96%) of its customers during the winter and this spring, and had won new business as more firms turned to outsourcing. The proportion of new customers that were outsourcing for the first time jumped to about 50%, up from around a third previously.

The chief executive, Dominic Blakemore, said: “With the gathering pace of vaccination rollouts across our major markets, we are working closely with our clients to prepare to reopen their sites safely, although the picture across the world remains mixed.”

Here is our updated story on Tui:

The FTSE 100 index in London has just gone through the 7,000 level after yesterday’s heavy sell-off. It is trading at 7,002, up 54 points or 0.79%.

Germany’s Dax is 0.3% ahead while France’s CAC and Italy’s FTSE MiB have edged 0.17% higher respectively.

As the pandemic subsides in some countries, the pet boom is coming to an end. Sad to see that as workers return to the office, animal shelters are getting busier again with more pets being abandoned.

While the UK stock market is having a better day than yesterday – the FTSE 100 in London is up 0.6% – the main indices in Germany, France and Italy are now flat.

US stock futures are pointing to a lower open on Wall Street later, with the tech-heavy Nasdaq seen falling 0.6% while the S&P 500 and the Dow Jones are set to fall by 0.4%.

Some more thoughts on the UK GDP and trade data from Ruth Gregory, senior UK economist at Capital Economics.

The 2.1% month-on-month gain in GDP in March was an impressive result given that there were few changes in the lockdown restrictions. The upside surprise was mostly due to construction output, which jumped by 5.8% m/m due to a rise in housebuilding ahead of the end of the stamp duty holiday in September. That left output in the sector 2.3% above its pre-crisis level.

Education output rose by 8.5% as schools reopened, helping boost the service sector, she notes. Manufacturers also increased production as firms moved towards more normal levels of output after the Brexit hangover caused a 2.4% month-on-month fall in January. Overall:

The burst of growth in March shows that the recovery has been gathering momentum more quickly than we had thought and suggests that the risks to our forecast for the economy to return to its February 2020 level by the end of 2021 are to the upside.

The reopening of sectors in the coming months should trigger rises in GDP of at least 3.0-3.5% quarter on quarter in Q2 and Q3.

Meanwhile, March’s trade figures showed that the UK’s goods export values (excluding oil and erratic items) to the EU have now almost reversed January’s 43.2% m/m plunge after the Brexit transition period ended. However, imports from the EU have continued to lag behind.

But she also points out that while UK GDP was still 5.9% below its pre-pandemic level in March, in the US, it is less than 1% below it.

Some analysis of the UK growth outlook from our economics editor, Larry Elliott.

He writes:

In normal circumstances, news that the UK economy had contracted by 1.5% in the first three months of 2021 would be considered deeply concerning. Falls of that size only tend to happen in the most severe recessions.

Yet the early months of this year were anything but normal. A new wave of the Covid-19 pandemic meant the country started 2021 in lockdown and it remained that way until restrictions were slightly eased in March. Simultaneously, new trade rules with the EU came into force.

Given that the first lockdown in the spring of 2020 led to the economy collapsing by almost a quarter, a decline of 1.5% will be seen by the Treasury and the Bank of England as moderately encouraging. After shrinking by 2.5% in January, the economy expanded by 0.7% in February and a further 2.1% in March.

The UK economy, meanwhile, could achieve the 7.25% growth forecast by the Bank of England this year, after a 2.1% rebound in March. It contracted by a record 9.9% last year – much worse than the EU and eurozone.

Rupert Thompson, chief investment officer at the wealth management firm Kingswood, says:

The UK economy held up better than expected during lockdown in the first quarter. GDP posted a 1.5% drop over the quarter as a whole but encouragingly grew a larger than expected 2.1% in March as the economy started to reopen. These numbers will bolster hopes that the economy will achieve the 7.25% growth forecast by the Bank of England – the fastest growth in seventy years.

Along with the jump in business confidence seen in April, they suggest the Bank’s growth forecast might even be on the conservative side – as indeed is the view of Andy Haldane the Bank’s Chief Economist.

Meanwhile, our energy correspondent Jillian Ambrose reports that the UK bank HSBC has stakes in firms that plan to construct more than 70 new coal-fired power stations.

A loophole in HSBC’s pledge to phase out financing for coal by 2040 will allow the bank to support companies with plans to build more than 70 new coal plants, which could cause an estimated 18,700 deaths from air pollution a year, according to a report.

The bank’s asset management arm, which is not included in the coal phase-out pledge, holds ownership stakes in companies that plan to build 73 coal power plants across 11 countries in Africa and Asia, almost enough to supply fossil fuel electricity to all the UK’s homes three times over.

Last night, it emerged that major US airlines had weighed in alongside UK carriers to urge the reopening of transatlantic travel, calling on governments in Washington and London to arrange a summit as soon as possible.

The airlines said safely reopening borders was essential for economic recovery and asked the nations’ leaders to meet before the G7, and take a decision with sufficient time for airlines to plan and restart services, writes our transport correspondent Gwyn Topham.

In a letter to transport secretaries of state in the US and UK, the chief executives of American, Delta, United and Jet Blue, along with those of British Airways and Virgin Atlantic, said vaccination levels in each country meant the lucrative routes, flown by 22 million passengers in 2019, could be safely reopened.

In other news...

Spain’s Balearic and Canary islands and Greece are expected to be the preferred destinations for Europeans booking long-awaited summer holidays when the travel industry reopens, according to the travel group Tui, although it will only operate three-quarters of its summer 2019 capacity, writes my colleague Joanna Partridge.

Europe’s largest travel company said this morning that low rates of Covid infections in key locations, combined with an accelerating vaccination programme in Europe, had improved the prospects for tourism this summer.

Here is our full story on the UK economy bouncing back with 2.1% growth in March.

We’ve also had German and French inflation data this morning. German inflation rose to an annual rate of 2% in April from 1.7, in line with the European Central Bank’s target.

In France, inflation edged higher to 1.2% last month from 1.1% in March, while the monthly gain was just 0.1% after 0.6% in March, according to Insee, the French statistics institute. Core inflation picked up to an annual rate of 1.6% from 1.4%.

Markets are waiting for inflation figures from the US later today.

The UK chancellor, Rishi Sunak, has also responded to the GDP figures:

Despite a difficult start to this year, economic growth in March is a promising sign of things to come.

As we cautiously reopen the economy, I will continue to take all the steps necessary to support our recovery.

Turning back to the GDP figures, Samuel Tombs, chief UK economist at Macroeconomics, says:

The UK economy almost certainly was the laggard in the G7 for a fourth consecutive quarter in Q1. GDP was some 8.7% below its pre-Covid Q4 2019 level, much worse than the 0.9% decline in the U.S., 4.4% in France, 4.9% in Germany and 6.9% in Italy. Japan and Canada have not reported Q1 data yet, but both economies had fared much better than the U.K. in previous quarters.

As before, the UK’s underperformance can be largely attributed to households’ spending, which fell by 3.9% quarter-on-quarter in Q1 and was 11.5% below its Q4 2019 peak. This chiefly was due to stay-at-home orders and commonplace home-working, both of which led to a sharp fall in services spending; in aggregate, households’ incomes have been unscathed by the pandemic, thanks to government policies.

Meanwhile, business investment fell by 11.9%, reversing most of the recovery seen in the previous two quarters. By contrast, real government expenditure rose by 4.8% quarter-on-quarter, reflecting rising testing, tracing and vaccination activities. In addition, net trade boosted quarter-on-quarter GDP growth by 2 percentage points, due to a collapse in imports following heavy pre-Brexit stockpiling in Q4.

However, the economy showed signs of life at the end of the first quarter, with output rising in 14 of the 18 sub-sectors in March, Tombs notes.

The reopening of schools in England on March 8 triggered a 8.6% month-to-month rise in output in the education sector, while the associated increase in Covid-19 testing contributed to the 1.7% rise in healthcare output. In addition, a recovery in confidence among households and businesses, thanks to the rapid rollout of vaccines, sparked a 2.9% jump in output in the distribution sector and 1.2% increase in private non-distribution services output.

Manufacturers also benefited from the reboot in global trade, with output rising by 2.1% month-to-month and the volume of goods exports increasing by 4.0%. Finally, construction output leapt by 5.8%, buoyed by the rush to finish new houses so that they can be sold before the threshold for stamp duty returns to £125,000 at the end of September.