The Dow Jones average of industrial stocks plummeted 148.36 points to close at 6,391.69, the first close below 6,400 since Dec. 18. The decline erased what was left of 1997's gains. Just a month ago the index was up nearly 10 percent for the year; now it's down almost 1 percent.
And prices fell on the 30-year Treasury bond - a key indicator of corporate and consumer borrowing costs - pushing its yield up to a nine-month high of 7.16 percent from 7.10 percent yesterday.
"The best news on inflation is now behind us," said economist Sung Won Sohn of Norwest Corp. in Minneapolis.
On the surface, two economic reports released by the government Friday should have been good news from the perspective of those worried about inflation. But there were enough crosscurrents to delight the proverbial three-handed economist.
Pushed down by the largest decrease in energy prices in six years, the Labor Department's Producer Price Index fell for the third month in a row, declining 0.1 percent in March after larger drops in January and February.
And the Commerce Department said retail sales, representing about a third of the nation's economic activity, rose a lackluster 0.2 percent - normally a level that would signal a softening in consumer demand.
But much of the weakness in retail sales was caused by a 0.6 percent slump in auto sales. Excluding this component, sales rose a respectable 0.5 percent. And February's gain was revised upward to 1.5 percent, from the initial estimate of 0.8 percent.
And, though prices paid to producers such as farms and factories were down overall, closely watched core prices - excluding food and energy - shot up unexpectedly.
For financial markets, it all added up to more evidence the Federal Reserve will have to follow last month's interest-rate increase with several more if it is to succeed in cooling demand and quelling inflationary pressures.
"The situation remains very good, but the warning flags are starting to be hoisted and that's the sort of thing that concerns the Federal Reserve," said economist Robert G. Dederick of Northern Trust Co. in Chicago.
For the Dow, which just a month ago was sporting a gain of nearly 10 percent on the year, its was the third drop of more than 140 points in 11 sessions.
Decliners led advancers by a 6-to-1 margin on the New York Stock Exchange, with 389 up, 2,309 down and 615 unchanged. NYSE volume was 444.36 million shares vs. 426.35 million yesterday.
The Standard & Poor's 500-stock list fell 20.69 to 737.65, and the NYSE's index fell 9.85 to 389.51. The Nasdaq index fell 28.87 to 1,206.90, and the American Stock Exchange index fell 7.03 to 556.16.
Higher inflation, brought on by brisk economic growth, could prompt the Federal Reserve to attack rising prices with an aggressive interest-rate boost. Two weeks ago, the Federal Reserve nudged one of the central bank's key lending rates higher.
The prospect of higher interest rates hurt banking and other financial services issues. The Dow's biggest loser was J.P. Morgan.
Economist Elliott Platt of Donaldson, Lufkin & Jenrette said the worrisome increase in core prices probably was a one-month glitch. Without the apparently one-shot increases in aircraft and tobacco, core prices would have risen only 0.1 percent, he said.
Food prices rose 0.9 percent, the first increase since October. Beef and veal prices jumped 6.8 percent, fish rose 7.9 percent and vegetables increased 13.3 percent. Roast coffee rose 12.9 percent.