Stocks plunge on inflation fears

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Stocks plummeted yesterday on signs that inflation is heating up, with the Dow Jones Industrial Average falling 214 points in its biggest drop in three years.

The Dow, in its greatest percentage decline since January, landed at 11,206 after a tumultuous day of heavy trading. The average has lost nearly 4 percent of its value since approaching an all-time high last week. The technology-driven Nasdaq Composite Index, down 1.5 percent to 2,196, yesterday fell into negative territory for the first time this year. The drubbing comes amid a broader global market meltdown featuring big declines in stocks, the dollar, and oil and other commodities prices as well as sharp increases in interest rates.

The prospect of higher inflation and slower growth is spooking the markets. Triggering yesterday's bloodletting was a report showing that consumer prices surged 0.6 percent last month, primarily on an 8.5 percent jump in gasoline prices but also reflecting price gains for housing, clothing and other essentials that are cutting into consumers' purchasing power and dampening the outlook for economic growth.

"It was not pretty," said Alexander P. Paris, an analyst with Barrington Research Associates Inc. "Investors are struggling with the transition in the economy."

Analysts said the surge in inflation ensures the Federal Reserve will remain wary and keep raising interest rates. Many on Wall Street fear the central bank will raise rates too far and slam the brakes on an already slowing economy -- leading to paltry growth next year.

"Investors may fear putting down their foot anywhere for fear of hitting a land mine," Mr. Paris said, noting that nearly every market is getting hit at once, producing sometimes contradictory trends. Oil and other commodities prices are falling from record levels, for example, causing a downturn in the stocks of oil and mining companies. That, in turn, is depressing the stock market, although it points to an easing of inflation pressures in the months ahead.

"Confusion sets in" during an economic expansion when growth slows and inflation picks up at the same time, said Scott Wren, a senior equity strategist at A.G. Edwards & Sons Inc. But he said he thinks commodities prices are topping out and economic growth and inflation will simmer down to a purr later this year, and that will benefit the stock market.

"Virtually every central bank around the world is raising interest rates or talking about it. It would be very unusual for commodity prices to continue marching higher" in that environment, he said. Because the stocks of financial firms and many other companies will do fine if both growth and inflation moderate, Mr. Wren said he views the current stock downturn as an opportunity to snap up blue-chip bargains.

Many on Wall Street and Main Street worry that consumers will be overwhelmed this year by rising inflation and interest rates, which cut into purchasing power, coupled with a declining housing market, which cuts into their wealth and sense of well-being. Home prices have peaked almost everywhere and are declining in many areas. The report yesterday showed inflation running at a 4.5 percent rate in the past three months.

"Ouch," said Mark Vitner, a senior economist at Wachovia Securities, blaming the jump in inflation primarily on rising energy and housing costs -- including rent, real estate taxes and utilities -- which have picked up even as home sales turned down in the past six months.

The 3 percent annual rate of increase in housing costs seen in the report primarily reflects a jump in rents as more people switch to renting rather than pay what they view as unaffordable or unrealistically high prices for houses, Mr. Vitner said.

However, a shortage of rentals has developed in many areas because landlords decided to convert their apartments to condominiums to take advantage of surging home prices during the housing boom, putting further pressure on rental costs, he said.

Roger M. Kubarych, an economist with HVB Group, called the rise in consumer prices "ominous" because of the increase in core inflation driven by housing, which he said will trouble the Fed. "Coming at a time when average home prices are actually declining, it adds a worrying factor."