Dow falls more than 600 points after inflation hits 40-year high, consumer sentiment plummets

Stocks dropped on Friday after a highly anticipated inflation report showed a faster-than-expected rise in prices and consumer sentiment hit a record low.

The Dow Jones Industrial Average shed 690 points, or 2.1%. The S&P 500 fell 2.5%, while Nasdaq Composite sank 3.1%.

The May consumer price index report came in at its highest level since 1981, putting pressure on the stock market. The report showed prices rising 8.6% year over year, and 6% when excluding food and energy prices. Economists surveyed by Dow Jones were expecting year over year increases of 8.3% for the main index and 5.9% for the core index.

"It's confirming some of the fears I've been hearing from investors this week," said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. She said alarm over inflation has been driving stocks lower this week.

"Does it sort of force equities to stay at the bottom the range it's been in? Perhaps. I don't think this is enough to force it down to new lows," Calvasina added.

The hot inflation flamed concerns about a potential recession for the U.S. economy. Elsewhere, the preliminary June reading for the University of Michigan consumer sentiment index came in well below expectations, hitting a record low.

"It just reinforces the impact the CPI number had on consumer psyche. We can guess this is going to have a negative future impact on consumer spending. It's a shocking number but this is what inflation does when it's running as hot as it is," said Peter Boockvar of Bleakley Advisory Group.

The sell-off was broad, with nearly every member of the 30-stock Dow in the red. Apple dropped 2.9%, while Microsoft and Dow, Inc. fell more than 3%.

The drop for stocks means that Wall Street is headed for yet another losing week. Entering Friday, the Dow was lower by 1.9%, on track for its 10th down week in the past 11. The S&P 500 and Nasdaq Composite were both off by more than 2%, on pace for their ninth losing week in 10.

The hot inflation reading could lead traders to price in more rate hikes from the Federal Reserve later this year. The 2-year Treasury yield, which is seen as one of the most sensitive to Fed rate hikes, jumped above 2.9% on Friday.

Tech stocks were under pressure as investors grappled with higher rates and a potential recession. Shares of Netflix dropped nearly 5% following a downgrade from Goldman Sachs. Chip giant Nvidia slid 4%.

Banks and cyclical stocks also moved lower, possibly reflecting recession fears. Shares of Wells Fargo shed 4%. Boeing dropped 3.6%.

On Thursday the S&P 500 and Nasdaq Composite each fell more than 2%. The Dow closed down more than 600 points, losing roughly 400 points during a rocky final hour of trading on Wall Street.

— CNBC's Patti Domm contributed reporting.