'Inflation Scare' Seizes Market as Prices Jump

Consumer prices rose in April at the highest rate in three months, the government reported yesterday, triggering a sharp drop in stock prices and adding to worries of higher inflation and rising interest rates.

The Dow Jones industrial average, which last week neared an all-time high, posted the worst one-day point loss of the year after the Labor Department said consumers paid more last month for gasoline, education, medical care, clothing and electricity as businesses passed along higher prices for energy and materials.

The department's consumer price index, a widely followed measure of inflation, rose by 0.6 percent in April, and 3.5 percent in the 12 months that ended in April.

The figures heightened investors' concerns that the Federal Reserve will keep raising interest rates to prevent inflation from taking off, despite signs that the economy is slowing because of a cooling housing market.

The Dow fell 214.28 points, to 11,205.61. The Standard & Poor's 500-stock index fell 21.76 points, to 1270.32.

"It's a real inflation scare in the market," said David Shulman, a visiting scholar at the UCLA Anderson Forecast, an offshoot of the University of California at Los Angeles Anderson School of Management. "The Fed may see a slowing economy coming from a weakness in housing construction, combined with rising inflation. It could smell like a stagflation. . . . Interest rates could be [headed] much higher than what was thought a few days ago."

The Fed raised its benchmark short-term interest rate last week and indicated that it had not decided whether it would increase it again at its next policymaking meeting, in June. Higher interest rates counter inflation by dampening consumer and business spending, causing economic growth to slow.

Fed Chairman Ben S. Bernanke told Congress in April that the central bank might leave rates unchanged at some point, even if inflation risks remained. Analysts took that as a strong hint of a Fed pause in June after two years of rate increases.

But the April CPI report makes another increase more probable, especially if the government reports similar inflation figures for May, analysts said yesterday.

Fed officials had expected a temporary increase in inflation because of energy prices, which rose 17.8 percent in the past 12 months. They expect inflationary pressures to ebb in coming months as the housing market loses steam.

But costs to businesses also are rising for copper, other metals, wood pulp, chemicals and other raw materials. With the economy growing rapidly in recent months, executives find they can pass more of these costs on to consumers.

For example, Kimberly-Clark Corp., which makes Kleenex tissues and Huggies disposable diapers, raised prices on toilet paper and paper towels in the first quarter but expected those increases to have more impact in the current quarter, executives told analysts in a recent conference call. The company also plans to raise prices on other products later this year.