US Stocks Drop After Latest Grim Inflation Report

US stocks closed modestly lower on Wednesday after investors digested hotter-than-expected inflation data, which fueled fears that the Federal Reserve could raise key interest rates by as much as 100 basis points later this month.

While all three major US equity indexes bounced off lows reached early in the day, and occasionally edged into positive territory throughout the session, they were all red by the closing bell.

The Dow Jones fell 0.67 percent to 30,772, the S&P 500 lost 0.45 percent to finish at 3,801 and the Nasdaq dropped 0.15 percent, to 11,247.

Year-on-year consumer price growth accelerated to a scorching 9.1 percent, the hottest reading since November 1981, driven by an 11.2 percent monthly spike in gasoline prices.

Stripping away volatile food and energy prices, which have abated since the report's survey period, core CPI cooled down to an annual rate of 5.9 percent.

"You would expect the CPI (report) that we saw would be a big risk-off event, but the market has shrugged," said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. "(Investors) were already expecting a very hawkish Fed and I don't think this affects much except uncertainty and that has something to do with why markets aren't selling off today."

The report raised odds that the Federal Reserve will raise interest rates even more than the 75 basis points previously expected. Traders of futures tied to the Fed funds target rate have now priced in the probability of a larger, 100 basis point, hike at the conclusion of its policy meeting later this month.

Nine of the 11 major sectors of the S&P 500 lost ground, with industrials and communications services suffering the largest percentage drop, while consumer discretionary enjoyed the biggest gain.

The second-quarter earnings season will hit full stride on Thursday, when JPMorgan Chase & Co and Morgan Stanley are due to post results, followed by Citigroup and Wells Fargo & Co on Friday. (Reuters)