Lindsay (NYSE) Dunsmuir, and Ann Saphir

(Reuters] – The U.S. Federal Reserve looks set to increase interest rates aggressively at least until summer to address rising labor costs and hot inflation, even though two reports on Friday suggested that both might be inching towards the top.

According to data provided by the Commerce Department, overall inflation rose sharply due to higher gas and food prices. This was a 40-year record. The Fed targets hot inflation at more than twice the level. This is why it is expected that the central bank will increase the pace of rate rises by averaging a half-point increment each of its three meetings. It is also likely to continue increasing rates throughout the year.

The Fed policy rate contract is tied heavily to contracts. This implies that interest rates will rise to between 3% and 3.25% at the end of this year. Borrowing costs would be well within the territory U.S. central banks believe will slow growth.

The inflation indicator that the central bank uses to monitor price pressures and is known as core personal consumption expenditures prices index (CPCEPI), slowed down slightly in March from 5.3%. Commerce Department’s report also showed new evidence of an elongated shift to spending on services. This is something Fed policymakers hope will help ease rising prices.

Unrelated data showed that some employers raised their employee benefits to get workers. The Fed believes the market for labor is very tight, perhaps even unhealthy. Private wage growth remained steady at 5%.

Andrew Hunter, senior U.S. economist, said that the reports won’t prevent the Fed from increasing by 50 bp next week but they support our belief that inflation will fall more quickly than Fed officials currently expect.

After being repeatedly burned in the assessment of inflation pressures which refused to decrease as expected over the last two years, Jerome Powell, Fed chief, doesn’t take anything for granted.

Powell declared just over one week ago that “we want actual progress on inflation.” He pointed out another round of potentially sustained upward inflation pressures resulting from the conflict in Ukraine and recent COVID-19 locksdowns in China, prolonging supply chains issues. It is possible that March was the peak, but that’s not known and we won’t count on that.

The Fed will raise interest rates next week at its policymaking meeting. This is to reduce overall demand, which has outpaced supply of both goods and labor. As another step to improve financial conditions, the Fed will give its approval to reduce its asset holdings.

Analysts weren’t encouraged by Friday’s reports. They noted that fears about a wage-price spiral are being heightened by the continuing rise in labor costs.

“These readings – which are showing no sign of easing – will be of concern to policymakers as they make decisions about monetary policy in an environment where the labor market is tight, and prices are at a 40-year high,” wrote HFE’s Rubeela Farooqi.