WASHINGTON — Inflation worries pounded Wall Street on Wednesday, and retail stocks joined in the sell-off.

The Dow Jones Industrial Average plunged 214.28 points on Wednesday to 11,205.61 following worries that inflation could be creeping into the economy, including the apparel sector, which has been in a long-term deflationary cycle. Higher prices on consumer goods could hit customer spending, squeezing the bottom line for merchants. Concerns have been exacerbated by spiraling gas prices, which are now hovering around $3 a gallon.

Investors pulled money out of the retail sector, driving Standard & Poor’s retail index down 0.8 percent, or 3.73 points, to 455.86. Among the decliners were Sears Holdings, down 2 percent to $137.96; Wal-Mart Stores, off 2.2 percent to $46.84; Dillard’s Inc., dipping 1.5 percent to $25.42; Target Corp., down 1.1 percent to $48.70; J.C. Penney Co., off 0.7 percent to $62.94, and Federated Department Stores, declining 0.7 percent to $72.85.

“It looks like a fairly red day, a lot of stocks are down,” said Richard Jaffe, an equity analyst at Stifel Nicolaus & Co.

Still, Jaffe said firms tend to trade on their own successes or failures and pointed to Abercrombie & Fitch Co., which saw its shares jump 2.2 percent to $61.01 on a strong earnings report Tuesday.

Prices on all goods and services, as reported in the Labor Department’s Consumer Price Index on Wednesday, increased a seasonally adjusted 0.6 percent in April, propelled by a 3.9 percent rise in the energy sector. Taking away volatile food and energy prices, the core CPI index increased by 0.3 percent.

“The news is not good,” said Edward Leamer, director of the UCLA Anderson Forecast. “Those inflation numbers seem like they’re more and more troubling.”

The Federal Reserve Board, which raised its benchmark federal funds interest rate to 5 percent earlier this month, said it would be watching indicators, such as the CPI, to gauge whether further increases were needed.

“The Fed is between a rock and a hard place here,” said Leamer. “The rate increase they’ve already put into place already killed off the housing market.”

This story first appeared in the May 18, 2006 issue of WWD. Subscribe Today.

Apparel prices were in lockstep with those in the overall economy, rising 0.6 percent in April. The trend in apparel, though, has been one of deflation and prices are down 6.4 percent from five years ago, reflecting a competitive retail landscape and increasing reliance on imports from low-wage countries such as China.

Prices on women’s apparel inched up 0.1 percent in April and are down 7.4 percent over the past five years. Within the women’s area, prices on outerwear slid 3.1 percent in April and dress prices fell 1.1 percent while suits and separates registered a 0.8 percent rise.

The lack of pricing power in apparel, especially in an environment where costs are increasing, makes branding and quality all the more important for retailers, said equity analyst Jennifer Black.

“You can get great prices for great products, but if your product is mediocre and it’s priced as a commodity, that’s going to be tough in an inflationary environment,” said Black. “The manufacturers will probably raise prices accordingly to whatever their raw material and shipping [costs] are. I think retailers and apparel manufacturers will have to be very tight because they all of a sudden have rising prices.”

Although gas prices make up a small portion of household spending, they factor into consumer spending and have risen steadily, with a gallon of regular gas selling for a nationwide average of $2.93 on Wednesday, compared with $2.16 a year ago, according to the American Automobile Association.

Looking beyond the immediate reaction of the stock market, the report on consumer prices lays bare a conundrum for retailers, where a more efficient supply chain has made life harder in some ways.

“The opportunity to buy better quality goods at lower prices is good, but when it translates into lower [retail prices], it’s challenging,” said Jaffe. “Just to break even against your rent, your payroll, your health care, which is all escalating, you have to sell more units and yet apparel consumption is growing very modestly, 3 to 5 percent.”

James F. Smith, director of the Center for Business Forecasting at the University of North Carolina at Chapel Hill, said concerns about inflation are overblown since the CPI is pegged to a market basket of goods fixed in the early Eighties.

However, in the realm of economics and especially the stock market, perception can have the same impact as reality, he noted.

“The bottom line is the stock market collapsed not because anybody gives a hoot about inflation per se, but because they say, ‘Oh that means the Federal Open Market Committee will go to 6 percent or something,'” said Smith.

The Fed next meets to formally discuss interest rates on June 28.

Higher interest rates can slow overall economic growth, curtailing job creation and depressing consumer spending. Increased prices also mean that consumers’ dollars won’t go as far. The U.S. economy has not seen sustained inflation for decades, with the worst period in recent memory being in the late Seventies during the Carter administration.