By Jerry Knight
Washington Post Staff Writer
Wednesday, May 17, 2006 4:51 PM
The stock market went into a nosedive today after Wall Street caught a whiff of inflation -- a smell that's been in the air for some time.
The Dow Jones industrial average suffered its biggest point loss of the year, falling 214 points to 11,205.61.
The Nasdaq Stock Market composite index dropped for the seventh day in a row, down 33 points to 2,195.80 Today's loss wiped out the last of Nasdaq's gains far this year, leaving the index down 10 points since Dec. 31.
The Standard & Poor's 500 stock index lost 22 points, closing at 1,270.32.
Stocks plunged in response to the government's report that the consumer price index jumped 0.6 percent last month.
That was only 0.1 more than what was forecast by economists surveyed by Bloomberg and exactly what the Wall Street Journal predicted this morning.
But the market responded as if the CPI report were a bolt from the blue. The rise in inflation blew apart hopes that the Federal Reserve won't have to boost interest rates higher to fight inflation. Interest rates jumped immediately in anticipation the Fed will increase rates again next month.
Wall Street's excuse for being shocked by the CPI was that the report showed a 0.3 percent jump in what economists call "core" inflation. That measure factors out energy and food costs, on the grounds they are always bouncing up and down.
Like the overall inflation rate, the "core" rate came in only 0.1 higher than expectations.
But after pretending for months that rising energy costs could be ignored because of low "core" inflation, traders today decided the price of oil matters after all.
The worry is that high oil prices are becoming embedded in the economy, subtly pushing up prices of all kinds of goods.
Evidence that is a real threat came today from DuPont, which announced it is boosting prices for all kinds of chemicals because of rising costs of raw material. DuPont said its raw materials costs in the first quarter were up 16 percent from a year ago.
Shares of banks -- whose profits often fall when interest rates rise -- led stocks lower.