Stock market news live updates: Stock losses accelerate into the close after inflation comes in hotter-than-expected

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U.S. stocks dropped sharply Wednesday afternoon as investors digested a key report on the state of inflation in the U.S., which came in hotter-than-expected across most major metrics.

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The S&P 500 fell by more than 1.5%, erasing earlier gains of as much as 1.2%. The index settled at 3,935.18, or its lowest level since March 2021. The Nasdaq dropped more than 3%, to end at 11,364.24, while the Dow declined by just over 1% to close at 31,834.11. Treasury yields gave back earlier gains, and the benchmark 10-year yield fell back below 3%.

The moves came in the wake of the Labor Department's April Consumer Price Index (CPI), which offered an update on price increases across the U.S. economy. While the report showed some deceleration in inflation compared to March, the rate of price increases came in well above many economists' estimates.

The CPI rose 8.3% in April over last year, coming down only marginally from March's 8.5% increase. That had been the fastest rate in about 40 years. Consensus economists were expecting an 8.1% increase in April, according to Bloomberg.

Much of that deceleration came as a result of a moderation in energy prices. But excluding the volatile food and energy categories, core CPI decelerated only modestly in April compared to March. Core CPI rose by 6.2% last month over last year, following March's 6.5% increase. This was also hotter than the 6.0% rise expected.

The latest inflation data helps to inform how far the Federal Reserve will have to go on raising interest rates and tightening monetary policies in order to rein in rising prices. Uncertainty about the Fed's next moves — and about whether these moves will bring down inflation while avoiding triggering a recession — has stirred up heightened volatility across risk assets, bringing the S&P 500 down by nearly 17% from its recent record high from Jan. 3. Stocks briefly turned lower Tuesday afternoon after Cleveland Fed President Loretta Mester said she saw the case for raising interest rates by 50 basis points at the next two Fed meetings, while leaving the door open to a potentially even larger 75 basis point rate hike.

"We're going to see more volatility. This is not going to be an easy path forward as we still have a lot of unknowns," Omar Aguilar, Schwab asset management CEO and chief investment officer, told Yahoo Finance Live on Tuesday. "There's still a lot of uncertainty in many parts, not just in the macroeconomic and the economic structure, but also just geopolitically, things that haven't been resolved, like the war in Ukraine as well as just the COVID situation in China."