MSCI's world stocks benchmark fell 0.33%, and all 11 major sectors in the S&P 500 ended the session lower, with energy and financials falling the most.
European shares closed 0.1% lower, dragged down by mining, banks and luxury stocks, which followed Asian luxury stocks in falling on a new spike in COVID-19 cases in Fujian, China.
The yield on the benchmark 10-year note fell more than 6 basis points on the day to a low of 1.263%, the lowest reading since Aug. 24.
The U.S. Labor Department said its Consumer Price Index (CPI) was up just 0.1% last month, compared with an expected increase of 0.3%. That was the smallest gain in six months, and it indicated that inflation has probably peaked. While that aligns with Federal Reserve Chair Jerome Powell's long-held belief that high inflation is transitory, economists and market watchers remain concerned by ongoing supply constraints and labor costs that could continue for months.
"Today's CPI data came in a bit weaker than expected, but (the Producer Price Index) is at a record high and inflation continues to be a key challenge for investors," said David Petrosinelli, Senior Trader at InspereX.
"These trends are indicating labor costs will continue to rise, which could make inflation stickier over the long-term."
The Fed will meet next week. The August CPI data lifts some of the pressure the Fed faced to announce it would begin tapering its massive bond-buying program.
Further delaying this key Fed announcement is "distorting" the economy and throwing off markets, said BlackRock's Chief Investment Officer of Global Fixed Income Rick Rieder.
"Continuing to stimulate demand higher increases the risk of a severe supply/demand mismatch across economic as well as financial assets," said Rieder, also the head of BlackRock's global allocation team.
The Dow Jones Industrial Average fell 292.06 points, or 0.84%, the S&P 500 lost 25.68 points, or 0.57%, and the Nasdaq Composite dropped 67.82 points, or 0.45%.
The prospect of a corporate tax hike in the United States from 21% to 26.5% as part of a $3.5 trillion budget bill is also front and center for investors.
Investment bank Goldman Sachs Group Inc estimates that if Democrats succeed in raising the corporate tax rate increase to 25% and get half of the hike proposed in foreign income tax rates, it could shave 5% off S&P500 earnings in 2022. In Asia, China's tightening grip on its technology companies again kept investors on edge after authorities told tech giants to stop blocking each other's links on their sites. MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.43%. The dollar index fell 0.03 points or 0.03%, to 92.645. The euro was flat against the dollar at $1.1807.
Oil prices ended largely unchanged as Tropical Storm Nicholas brought heavy rain and power outages in Texas but caused less damage to U.S. energy infrastructure than Hurricane Ida caused earlier this month. [O/R]
Brent crude settled up 90 cents, or 0.1%, at $73.60 a barrel. U.S. crude ended 10 cents higher at $70.46 per barrel. Spot gold prices rose $12.7509, or 0.7%, to $1,806.24 an ounce. [GOL/]
(Reporting by Elizabeth Dilts Marshall in New York; Tom Arnold in London and Scott Murdoch in Hong Kong; Editing by Marguerita Choy and Nick Zieminski)
By Elizabeth Dilts Marshall