Dow dips after record

NEW YORK (CNNMoney.com) -- Worries about inflation sent blue chips lower Wednesday, with the Dow Jones industrial average backtracking one day after closing at a record high.

The Dow (down 48.23 to 12,738.41, Charts) lost 0.4 percent. The broader S&P 500 (down 2.05 to 1,457.63, Charts) index gave back around 2 points, after ending the previous session at a six-and-a-half-year high.

The tech-fueled Nasdaq (up 5.38 to 2,518.42, Charts) composite added a few points, ending at a six-year high for the second session in a row.

A bigger-than-expected jump in a key inflation reading, the minutes from the last Federal Reserve meeting and a jump in oil prices all played a role in the session.

Hewlett-Packard's upbeat earnings and forecast failed to impress investors, with the stock sliding in active trade.

Treasury prices slipped, raising the corresponding yields. The dollar gained versus other major currencies.

After the close, Whole Foods (Charts) said it would buy rival Wild Oats Markets (Charts) for around $565 million in cash. The news sent shares of Whole Foods more than 4 percent higher in extended-hours trading and shares of Wild Oats more than 16 percent higher.

Thursday morning brings the weekly jobless claims report and earnings from JC Penney (Charts) and Toll Brothers (Charts).

Stocks rallied Tuesday after a long holiday weekend, thanks to several big mergers and a decline in oil prices. But after hitting multiyear highs, the major gauges were vulnerable to a pullback Wednesday.

The morning's Consumer Price Index - which showed a surprising resilience in a key inflation measure - provided the catalyst.

Investors also digested the afternoon release of the minutes from the last Federal Reserve policy meeting in January. The minutes essentially reiterated what Fed officials have been saying lately, that the economy is moderating but not too quickly, and that inflation remains a concern, even though it seems to be waning.

"I think it's pretty much in line with what we've been hearing from the speakers," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez Inc., noting that last week's congressional testimony from Fed Chairman Ben Bernanke kind of stole the thunder from the minutes.

The afternoon also brought comments from a trio of Fed officials that built on the same message of the economy slowing at a reasonable pace, but inflation remaining a worry.

The January Consumer Price Index (CPI) rose 0.2 percent versus forecasts for a rise of 0.1 percent, while the so-called core CPI, which strips out food and energy prices, rose 0.3 percent, above forecasts for a 0.2 percent gain.

The report may have been a surprise to investors looking for a further confirmation that pricing pressure is waning.

Treasury prices slipped on the report as traders bet interest rates are unlikely to come down any time soon. The decline lifted the yield on the benchmark 10-year note to 4.70 percent from 4.68 percent late Tuesday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar gained versus the euro and the yen.

The CPI report "underscores the fact that they [the Fed officials] are not going to be relaxed about inflation, however it's nothing to cause them to go crazy," Shapiro said. "The core inflation trend is sort of flat."

A separate report, the January index of leading economic indicators, rose 0.1 percent after rising 0.6 percent in the previous month. Economists thought it would rise 0.2 percent.

San Francisco Federal Reserve Bank President Janet Yellen said Wednesday afternoon that the main risk to the Fed's scenario is whether inflation will continue to ease, but monetary policy is currently well-positioned for it to do so.

In a television interview Wednesday afternoon, St. Louis Federal Reserve Bank President William Poole said that interest rates are sitting well at the moment, Reuters reported. However, he also said that the central bank would be sooner to make a move against rising inflation - in other words, to raise rates - than it would be to move to stoke growth.

Federal Reserve Governor Donald Kohn spoke in the early afternoon but did not directly address the direction of interest rates.

In corporate news, Dow component Hewlett-Packard (down $2.03 to $41.10, Charts) reported quarterly sales and earnings that increased from a year earlier and topped estimates. The company also forecast fiscal year 2007 sales and earnings in a range that beats analysts' forecasts.

But the news, released late Tuesday, failed to impress investors Wednesday, and the stock slipped 4.7 percent.

Including HP, 21 out of 30 Dow stocks fell. Other standouts to the downside included General Motors (down $0.58 to $35.37, Charts), Intel (down $0.30 to $20.88, Charts) and Citigroup (down $0.44 to $53.75, Charts).

NovaStar Financial (down $7.46 to $10.10, Charts) slumped 42.5 percent in unusually active New York Stock Exchange trading after the subprime lender reported a fourth-quarter loss late Tuesday and said it would have little or no taxable income next year.

On the upside, Apple Computer (up $3.30 to $89.20, Charts) gained 3.8 percent after Prudential boosted its current-quarter earnings forecast to 68 cents per share from 64 cents, owing to stronger Mac sales, Briefing.com reported.

U.S. light crude oil for April delivery jumped $1.22 to settle at $60.07 a barrel on the New York Mercantile Exchange, a gain of over two percent.

COMEX gold for April delivery rose $23 to settle at $684 an ounce.

The rally in oil and gold prices boosted the underlying stocks. Oil services firms such as Valero Energy (up $1.93 to $57.90, Charts) and Sunoco (up $1.72 to $64.09, Charts) gained. A run-up in gold stocks lifted the Amex Gold Bugs (up $15.47 to $354.57, Charts) index by 4.5 percent.

Market breadth was negative. On the New York Stock Exchange, losers beat winners 8 to 7 on volume of 1.43 billion shares. On the Nasdaq, decliners topped advancers by a narrow margin on volume of 2.06 billion shares.

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