Investors were spooked by a Labor Department report that its consumer price index swelled 0.6 percent in April, topping forecasts of 0.5 percent. But core CPI — without food and energy — also gained 0.3 percent, ahead of estimates and adding to worries that soaring oil prices have begun to lift prices elsewhere.
into law and said it will put more money back into Americans' pockets, but the Dow has now lost more than 400 points since the Fed raised rates last week, reports CBS News correspondent Anthony Mason.
The inflation data dragged bonds lower and overshadowed solid earnings from Hewlett-Packard Co. and cooling oil prices. Wall Street has been extremely anxious about economic news after the Fed said last week that more rate hikes could be needed to battle inflationary pressures from record commodities prices.
"The CPI data really kicked the market in the teeth today," said Ken Tower, chief market strategist for Schwab's CyberTrader. "So the question now really is where can we find some support?"
As the Dow came within 80 points of its best-ever close of 11,722.98 last week, many analysts felt the market was overbought and would soon see a correction. But Tower said stocks are now oversold after several days of steep losses, suggesting that investors may start looking for positive signs to spur buying.
The Dow sank 214.28, or 1.88 percent, to 11,205.61, a one-month low. The blue-chip index was down as much as 245.51 points earlier in the day and logged its biggest single-session slide since falling 307 points on March 24, 2003.
Broader stock indicators also declined. The Standard & Poor's 500 index lost 21.76, or 1.68 percent, to 1,270.32, its lowest close since finishing at 1,262.86 on Feb. 13; the Nasdaq fell 33.33, or 1.5 percent, to 2,195.80, showing a loss for the first time in 2006.
Declining issues led advancers by nearly 5 to 1 on the New York Stock Exchange, where volume of 2.1 billion shares topped the 1.7 billion shares that changed hands Tuesday.
The prospect of higher interest rates hurt bonds, with the yield on the 10-year Treasury note surging to 5.16 percent from 5.1 percent late Tuesday. Last Friday, bond yields reached a four-year high of 5.19 percent.
While Wednesday's retreat reflected Wall Street's ongoing nervousness about interest rates, investors may have gotten ahead of themselves before last week's Fed meeting. Many traders were betting that the central bank would pause its two-year streak of rate hikes, and catapulted the major indexes to fresh multiyear highs.
The Fed boosted rates to 5 percent and left flexibility to pause its rate tightening. However, the Fed cautioned that soaring oil and gold prices pose a threat to inflation and could warrant higher interest rates to stifle demand and keep prices from escalating. The CPI report and Tuesday's producer price index reading reinforced that warning.
Gregory Miller, SunTrust Banks' chief economist, said the market was still largely split on whether the Fed will increase the key short-term lending rate by another quarter percentage point when policymakers meet on June 29.
"It won't surprise me if this is when they decide to start the pause and allow data to accumulate," Miller said. "I suspect what they'll find is energy prices will stop trending higher, and the slower growth numbers will accumulate."