The Dow Jones Industrials stock composite ended the day down 214 points, reflecting a sell-off that began when the government released a report showing that April's consumer prices had increased much faster than expected. Investors are guessing that inflation could lead the Fed to raise interest rates.
News that the Consumer Price Index had risen by .6 percent in April sent stocks falling in both the United States and Europe. By the middle of the afternoon, the Dow Jones Industrial Average was down almost two percent. And the NASDAQ composite index hit a six-month low. Bond prices also took a nosedive.
Much of the increase was in housing costs, especially in the form of rents. That led Ian Shepherdson, chief U.S. economist at High Frequency Economics, to say the market's response may have been something of an overreaction. Nigel Gault, U.S. economist at Global Insight, says that as interest rates have risen, people have stopped buying homes as fast as they were. That is sending more people to the rental market, which is already extremely tight.
If the economy has now reached a period of higher inflation, that would force the hand of the Federal Reserve. The federal bank has already raised rates by 4 full percentage points over the past few years. And Fed chairman Ben Bernanke warned last week that rates may have to keep rising to control inflation. Investors are worried that the new numbers make that kind of prospect more likely.