Inflation fears send investors scurrying for the exit

Stocks fell sharply Wednesday as investors fretted over data showing that U.S. consumer prices rose at their fastest rate last month since 2008, raising concerns about surging inflation amid the pandemic recovery.

The Dow slid 681 points, or 2%, to close at 33,588. The broader S&P 500-stock index fell 89 points, or 2.1%, to 4,061, while the tech-heavy Nasdaq ended the day down 2.7%. The S&P 500, which like the Dow reached a record high on May 7, is flirting with its worst weekly drop since October, down about 4% in just three days.

Investors have been worrying that inflation could return after being absent for many years as the economy revs out of the recession brought on by the pandemic. Federal Reserve officials and other economists have said moderate inflation may actually be a good thing in a recovery.

Biggest price jump since Great Recession

The Consumer Price Index, which tracks the prices of everything from cars to clothing, jumped 0.8% in April, the Labor Department said Wednesday. Over the past 12 months, prices have increased 4.2% — the fastest rise since September 2008. Used-car prices led the surge, with a record 10% increase. But the gains were broad-based. Core inflation, which excludes volatile food and energy prices, jumped 3% over the past year.

While the latest reading on inflation was hotter than expected, the market shouldn't be too surprised about it, said Jeff Buchbinder, equity strategist at LPL Financial. The prevailing sentiment is that rising inflation will be temporary, though "it's too early to say whether these higher levels are going to be sustained," he said.

"Inflation and interest rate jitters are hitting the market today, but for now the sell-off has been orderly. Letting some air out of these sky-high valuations is a positive going forward," Cliff Hodge, chief investment officer for Cornerstone Wealth, said in an email.

Concerns about inflation spikes also raise the question of whether the Federal Reserve will change its posture on maintaining low interest rates as the economy recovers. Buchbinder said investors shouldn't expect that to happen any time soon, however, given that the U.S. economy, and particularly the job market, are still a long way from being fully recovered.

"Really the Fed has one mandate right now, which is to regain full employment, and it's going to take some time," Buchbinder said.

Pipeline attack fuels surging energy prices

Analysts expect consumer prices to rise further as the economy recovers, but higher prices could run the risk of curtailing some spending, which the economy needs to sustain its recovery. The cost of new cars rose 0.5% in April, the largest increase since last July, because of heavy demand and a computer chip shortage that has slowed production and reduced dealer supplies.

Rising inflation makes stocks seem more expensive, particularly high-value tech stocks that trade on the potential for their future profits in coming years. Apple, Microsoft, Facebook and Amazon were all down nearly 2% or more Wednesday.

Energy prices continued to climb following the shutdown of a major gas pipeline on the East Coast earlier in the week, and there are now reports of gasoline hoarding happening in places like North Carolina. The price of U.S. crude oil rose 1.6% and wholesale gasoline rose 1.3%. The higher prices are helping energy companies make gains as the rest of the market slips.