Dow Plunges 42.50 Over Inflation Hike : Consumer Price Increase, Greenspan’s Plan to Raise Interest Worry Traders

Stock prices posted their biggest decline in three months today after the government reported a jump in consumer prices and the head of the Federal Reserve said he is disturbed by recent inflation trends.

The Dow Jones average of 30 industrials fell 42.50 to 2,283.93, its biggest drop since Nov. 11, 1988, when the average tumbled 47.66.

Declining issues outnumbered advancing ones by nearly 4 to 1 on the New York Stock Exchange, with 321 up, 1,196 down and 444 unchanged.

Big Board volume totaled 163.14 million shares, against 141.95 million in the previous session.

The NYSE’s composite index fell 2.51 to 163.55.

At the American Stock Exchange, the market value index fell 2.98 to 321.88.

The statement by Fed Chairman Alan Greenspan, coupled with the Labor Department’s report that consumer prices rose at a 7.2% annual rate in January, raised concerns that the Fed would tighten interest rates to squelch inflation.

High short-term interest rates could drain money from stocks and into higher-yielding securities like Treasury bills. In addition, high rates might push the economy into a recession that would be bad for stocks.

“There has been a lot of optimism built into the market, and you’re seeing some of that come out,” said John Candela, head of fixed-income and commodities trading at Ladenburg, Thalmann & Co.

The biggest jump in consumer prices in two years stirred inflationary fears and pushed the bond market down in early trading today.

The Treasury’s benchmark 30-year bond fell 1/2 point, or $5 per $1,000 face amount, while its yield, which moves in the opposite direction from its price, rose to 9.10% from 9.05% late Tuesday.

The government’s report that consumer prices shot up in December triggered pessimism in the bond market, according to Steven A. Wood, an economist with BankAmerica Capital Markets Group in San Francisco.

He said traders also had hoped for a stronger commitment from Federal Reserve Board Chairman Alan Greenspan to fight inflation by raising interest rates than he showed during congressional testimony Tuesday.

“We’ve seen very light activity this morning with people looking at the (consumer price index) number as a negative,” Wood said. “Greenspan’s comments sort of reinforced that.”

In the secondary market for Treasury bonds, prices of short-term governments fell 3/32 to 3/16 point, intermediate maturities were down 7/32 to 11/32 point and long-term issues dropped 7/16 to 17/32 point, according to the Telerate Inc. financial information service.

The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.

The Shearson Lehman Hutton daily Treasury bond index, which measures price movements on outstanding Treasury issues with maturities of a year or longer, fell 3.14 to 1,123.55.

In corporate trading, industrials were up. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, rose 0.12 to 297.78.

Yields on three-month Treasury bills rose to 8.84% as the discount rose 7 basis points to 8.54%. Yields on six-month bills rose to 9.01% as the discount rose 2 basis points to 8.53%.