updated 12/17/2007 7:42:23 AM ET 2007-12-17T12:42:23

Stocks sold off Friday after a jump in consumer inflation raised concerns about how much freedom the Federal Reserve has to continue cutting interest rates.

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The Labor Department said the consumer price index rose 0.8 percent in November amid a spike in gasoline prices. The report also found large increases in the cost of clothing, airline tickets and prescription drugs.

The report raises questions about the Fed’s options for priming the economy. The Fed this week lowered interest rates and announced a plan to align with other key central banks and offer loans to pressed lenders around the world. But while it wants to stimulate the U.S. economy and make lending easier among banks wary of faltering debt, the Fed also has to keep a watchful eye on inflation.

Robert Dye, senior economist at PNC Financial Services Group, said the economic readings this week painted a mixed picture for investors, spurring some of the market’s volatility.

“If you take the stronger-than-expected economic data we saw this week in the form of retail sales and add to that the inflation data and then combine that with a somewhat ambiguous statement from the Fed, you get a picture as clear as mud,” he said.

The uncertainty weighed on the markets Friday, a day after stocks finished mixed. The Dow Jones industrial average closed the day down 178.11 points, or 1.32 percent, having accelerating its losses in afternoon trading. The broader Standard & Poor’s 500-stock index dropped 20.46 points, or 1.37 percent, while the Nasdaq composite index lost 32.75 points, or 1.23 percent.

Bond prices fell for the third straight day. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 4.23 percent from 4.21 percent late Thursday. The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude dropped 98 cents to $91.27 per barrel on the New York Mercantile Exchange.

Friday’s report on inflation follows a reading Thursday that showed the biggest jump in inflation at the wholesale level in 34 years.

The 0.8 percent increase in consumer prices topped the 0.6 percent rise economists had been expecting. The report also showed so-called core inflation, which excludes often-volatile food and energy prices, had its biggest increase in 10 months, rising 0.3 percent.

Dye said the Fed could be proven wise for cutting interest rates by just a quarter of a percentage point Tuesday rather than by a half point as some investors had hoped. Stocks fell sharply Tuesday after the Fed’s rate decision and staged a partial rebound Wednesday after the Fed announced its liquidity plan with other central banks.

The uptick in core inflation is unnerving, Dye said, because it makes it harder for the Fed to justify further rate cuts.

Also Friday, the Federal Reserve said industrial production rebounded in November, increasing 0.3 percent after a steep 0.7 percent decline in October. The increase came in slightly ahead of Wall Street’s expectations.

But beyond economic reports, investors faced more news from the troubled banking sector.

Citigroup Inc. fell 31 cents to $30.70 after the bank announced late Thursday it plans to move assets from seven “structured investment vehicles” onto its books and put up $49 billion to help the SIVs repay their debts.

The bank had said earlier it had no plans to bring the SIVs onto its books. Citigroup’s Vikram Pandit, who on Tuesday became chief executive, said taking control of the SIVs was the best way to guard their credit ratings and help them sell their investments at decent prices.

SIVs are complex investments set up by banks and sold to investors and have come under pressure in recent months because of their investment strategy, which involves the use of mortgage investments and other now-risky debt. The resulting drop in demand hurt the value of the SIVs.

Overseas, Japan’s Nikkei stock average slipped 0.14 percent. Britain’s FTSE 100 rose 0.52 percent, Germany’s DAX index rose 0.25 percent and France’s CAC-40 rose 0.26 percent.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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