Investors' fears about inflation found substance on Wednesday, as the consumer price index jumped more than expected and stocks slumped in early trading.
Before the market open, the U.S. stock-index futures were down sharply but have since come back. The S&P 500 is at 2,672.99, up 10.05 points, or 0.38%, while the Dow Jones Industrial Average stands at 24,676.67, up 36.22 points, or 0.15%. The Nasdaq Composite is at 7,073.62, up 60.11 points, or 0.86%.
The consumer price index rose 2.1% on a year-over-year basis, ahead of the 1.9% that analysts had been expecting. The core CPI, which excludes food and energy, rose 1.8%, ahead of expectations for 1.7%.
"In perhaps the most highly anticipated monthly CPI in recent memory, today's results lived up to the hype," says Mike Loewengart, VP of Investment Strategy at E*Trade.
It's just one data point, and the rate could slow next month, but investors have been on edge about inflation for weeks. Faster inflation raises the possibility that the Fed will raise interest rates more quickly than expected to tamp down the price increases. The market has been dependent on easy monetary policy during this bull market.
Prices for gasoline, medical care, and rent all spiked during the month. Apparel, which has been slumping, ticked higher, although it's still down on a year-over-year basis.
The Fed worries about inflation because it wants to manage economic cycles. And when prices rise too fast and the economy runs too hot, it can make those cycles more dramatic -- and more painful on the way down.
Still, one month does not make a trend, and the Fed officials have become more focused on telegraphing their intentions to investors, to minimize surprises.
"Cooler heads will tell you the potential for an accelerated rate agenda from the Fed still looks unlikely," Loewengart argues.
Also, another data point released Wednesday pointed in the opposite direction: Retail sales unexpectedly declined, indicating that the economy isn't yet overheating, at least not in retail.
In the meantime, investors need to be ready for more volatility.