* U.S. consumer prices rise 0.5 pct in January vs est 0.3 pct
* Surprise drop in Jan retail sales raises econ growth fears
* U.S. 10-year bond yields hit session highs after CPI data
* Indexes down: Dow 0.29 pct, S&P 0.31 pct, Nasdaq 0.29 pct (Updates to open)
By Sruthi Shankar
Feb 14 (Reuters) - U.S. stocks fell on Wednesday, after three days of gains, as strong inflation data fanned fears of faster interest rates hikes, while an unexpected fall in January retail sales raised concerns about economic growth.
The inflation data sent benchmark U.S. 10-year Treasury yields to a session high of 2.8820 percent, making bonds more attractive than stocks.
The Labor Department said its Consumer Price Index increased 0.5 percent last month as households paid more for gasoline, rental accommodation and healthcare. Economists polled by Reuters had forecast an increase of 0.3 percent.
Excluding the volatile food and energy components, the CPI shot up 0.3 percent, the largest increase since January 2017. However, the year-on-year rise in the so-called core CPI was unchanged at 1.8 percent in January.
Separately, a report showed U.S. retail sales decreased 0.3 percent last month, the biggest fall in nearly a year and a surprise drop compared with economists’ expectations of a 0.2 percent rise.
“In some ways you would say this is the worst possible number for U.S. equities: extremely weak U.S. retail sales and a higher CPI. I think there is less to the numbers than meets the eye, however,” Steven Englander, head of research and strategy at Rafiki Capital in New York, said.
“It does play into the fears that we are getting into a different inflation regime than we were before. The last ten years was below target inflation and now the expectations are adjusting upwards, which means the Fed is not as friendly.”
By 9:34 a.m. ET, the Dow Jones Industrial Average was down 0.29 percent, at 24,568.22. The S&P 500 fell 0.31 percent to 2,654.59 and the Nasdaq Composite slipped 0.29 percent to 6,993.05.
U.S stock futures fell more than 1 percent after the CPI data was released at 8:30 a.m. ET. They were higher by about 0.5 percent ahead of the report.
However, the CBOE Volatility index, which measures near-term volatility in the stock market, initially spiked after the data. The VIX is currently near sessions lows at 21.06, and well below the 50-point mark it hit last week.
Financial stocks were the only gainers among the 11 major S&P indexes. Banks benefit from higher interest rates.
Among stocks, Fossil shares soared 70 percent as short sellers rushed to cover their positions, a day after the watchmaker posted strong holiday quarter sales.
Chipotle jumped about 15 percent after it hired Brian Niccol from Taco Bell as its next chief executive, an move that analysts called a potentially “transformational moment.”
Declining issues outnumbered advancers on the NYSE by 2,062 to 526. On the Nasdaq, 1,727 issues fell and 649 advanced. (Reporting by Sruthi Shankar in Bengaluru; Editing by Savio D’Souza)