Wall Street worries about inflation

Video

More video

Hewlett-Packard is one of the few bright spots in the markets after reporting strong earnings. Play video

NEW YORK (CNNMoney.com) -- Stocks slipped Wednesday morning after a jump in consumer prices amplified worries about rising inflation after oil prices closed at all-time highs above $100 a barrel in the previous session.

The Dow Jones industrial average (INDU) and the broader Standard & Poor's 500 (SPX) index both lost about 0.5% roughly two hours into the session. The Nasdaq composite (COMP) lost 0.4%.

The consumer price index (CPI), rose 0.4% in January, matching December's rise and surprising economists who were looking for CPI to rise just 0.3%. So-called "core" CPI, which eliminates volatile food and energy prices, rose 0.3% in the month, after rising 0.2% in December. Economists thought core CPI would rise 0.2% again in January.

The CPI report - paired with the recent run up in both oil and gold prices - exacerbated worries that the slow-growing economy may now also have to contend with higher pricing pressure.

Should inflation stay strong, this would limit the Federal Reserve's ability to continue cutting interest-rates, something the stock market is expecting. The Fed has cut rates five times since September in an attempt to keep the economy out of recession amid the credit and housing market crises. The central bank has also loaned billions to commercial banks through a series of auctions aimed at boosting liquidity.

While the loans have already had an impact, the rate cuts are expected to begin working their way through the system later in the year, helping the economy stave off a bigger slowdown. But the flip side of lowering rates is that it tends to boost inflation, and if pricing pressure is already an issue, as the CPI and oil prices would suggest, the Fed's ability to keep cutting rates could be limited.

In the afternoon, the minutes from the last Federal Reserve policy meeting will be released.

Another report showed that January housing starts grew, although less than expected, while January building permits fell less than expected. The report also showed that new construction of single-family homes fell to a 17-year low. (Full story).

Oil not far from record. Stocks ended lower Tuesday after crude oil prices spiked to a record settle of $100.01 a barrel on worries about potential OPEC production cuts paired with the fallout from a Texas refinery fire.

Oil retreated a bit off those highs Wednesday, with oil for March delivery falling 91 cents to $99.10 a barrel on the New York Mercantile Exchange.

Corporate news. After the close of trade Tuesday, Hewlett-Packard (HPQ, Fortune 500) reported higher fiscal first-quarter sales and earnings that topped forecasts. The personal computer and printer maker also boosted its current-quarter profit outlook. Shares jumped 7% Wednesday morning.

But other corporate news was less positive, with telecom stocks again slumping on competitive worries.

On Tuesday, Dow components AT&T (T, Fortune 500) and Verizon Communications (VZ, Fortune 500) tumbled after the two companies announced dueling unlimited calling plans, with investors worried about how the plans will impact profitability.

AT&T dropped another 7% Wednesday after Credit Suisse downgraded it to "neutral" from "outperform," citing the weakening economy and increased competitive pressures. Verizon shares slumped too.

KKR Financial (KFN), a listed arm of private equity firm Kohlberg Kravis Roberts & Co. has delayed repaying billions in debt amid the credit market fallout. The company is in restructuring talks with its creditors.

Market breadth was negative. On the New York Stock Exchange, losers topped winners three to two on volume of 500 million shares. On the Nasdaq, decliners topped advancers four to three on volume of 880 million shares.

Other markets. Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.87% from 3.89% late Tuesday. Bond prices and yields move in opposite directions.

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

COMEX gold for April delivery fell $2.50 to $927.30 an ounce.