By Karen Langley and Joe Wallace 

U.S. stocks extended their losses Wednesday, with the Dow Jones Industrial Average and S&P 500 posting their steepest three-day declines in nearly seven months, after a sharp rise in consumer prices heightened concerns about inflation.

The jump in prices was steeper than expected and exacerbated fears that inflation could prompt the Federal Reserve to accelerate its timeline for scaling back its easy-money policies. Near-zero rates have buoyed demand for stocks, which have hit dozens of records since the coronavirus pandemic sent them tumbling early last year.

"Not only is just inflation and unexpected inflation a bad story for any type of real returns in your portfolio, it's also increasing the uncertainty around what the Fed's next moves are going to be over the next couple of months," said Matt Forester, chief investment officer of Lockwood Advisors at BNY Mellon Pershing.

The S&P 500 fell 89.06 points, or 2.1%, to 4063.04. The Dow Jones Industrial Average retreated 681.50 points, or 2%, to 33587.66. The broad U.S. stock index is down 4% this week, while the blue chips are down 3.4%, the largest three-day drop for both indexes since late October.

The tech-heavy Nasdaq Composite slumped 357.75 points, or 2.7%, to 13031.68. The Nasdaq is down 5.2% this week -- its worst three trading days since early March.

Concerns that a burst of inflation as the economy strengthens could prove long-lasting had sharpened the focus on Wednesday's price data. The consumer-price index jumped 4.2% in April from a year before, according to the Labor Department, the most in any 12-month period since 2008. The index measures what consumers pay for goods and services such as clothes, restaurant meals and vehicles. Economists had expected a less pronounced increase.

"That's starting to get investors a little bit nervous here since we are trading still near all-time highs across the equity market," said Tony Bedikian, head of global markets at Citizens.

The S&P 500 on Friday notched its 26th record close of the year, while the Dow Jones Industrial Average hit its 24th high.

Since then, signs of mounting inflation have weighed on stocks. Rising commodity markets, supply-chain blockages and hiring difficulties have prompted some investors to expect a prolonged upswing in consumer prices.

That could lead the Federal Reserve to raise its target for short-term interest rates sooner than it has signaled, potentially weighing on stocks and other assets that have benefited from over a year of near-zero borrowing costs. A top Federal Reserve official, vice chairman Richard Clarida, said Wednesday that more data would be needed for the central bank to begin scaling back its policies.

Other factors have also knocked down stocks in recent days, including signs that the U.S. economy -- while still expanding at a fast clip -- has passed its peak rate of growth, said Anna Stupnytska, global economist at Fidelity International. The market was also vulnerable after a steep run-up in prices at the start of the year.

"The main worry is that...because of inflation moving higher, central banks will start tightening," Ms. Stupnytska said. She thinks U.S. inflation will subside next year and that the Fed won't hike rates until well into 2023. Still, multiasset funds at Fidelity International have bought Treasury inflation-protected securities, gold and industrial metals as a hedge against inflation.

Bond yields jumped after the release of the consumer-price data. The yield on the benchmark 10-year U.S. Treasury note climbed to 1.693%, from 1.623% Tuesday -- its largest one-day yield gain since March. Inflation erodes the value of bonds' fixed payments.

Among individual stocks, shares of FuboTV rose $1.71, or 9.7%, to $19.38 after the sports streaming company reported that revenue more than doubled in the first quarter and boosted its guidance. Shares of Houlihan Lokey gained $4.48, or 6.8%, to $70.37 after the investment-banking services firm reported record revenue for its fiscal year and raised its dividend.

In commodity markets, Brent-crude futures, the benchmark in energy markets, rose 1.1% to $69.32 a barrel. The glut of crude and oil products that built up near the start of the pandemic has mostly cleared in members of the Organization for Economic Cooperation and Development, the International Energy Agency said in a monthly report.

Overseas, markets were mixed. The Stoxx Europe 600 added 0.3% after on Tuesday posting its biggest one-day fall since December. Japan's Nikkei 225 fell 1.6%, while China's Shanghai Composite rose 0.6%.

Write to Karen Langley at karen.langley@wsj.com and Joe Wallace at Joe.Wallace@wsj.com

(END) Dow Jones Newswires

May 12, 2021 17:30 ET (21:30 GMT)

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