Updated from 11:17 a.m. EDT

A higher-than-expected March consumer price index spooked markets Wednesday, reviving the specter that inflation is rearing its ugly head.

The price of the 10-year Treasury was recently down 11/32, giving back the bulk of Tuesday's rally; its yield was rising to 4.25%. Amid some early choppiness, major stock proxies were recently mixed with the

Dow Jones Industrial Average

up 0.2% to 10,148.61 and the

Nasdaq Composite

up 0.4% to 1939.78 behind strength in bellwether names such as

Yahoo!

(YHOO)

,

Intel

(INTC) - Get Report

and

Google

(GOOG) - Get Report

. But the

S&P 500

was off 0.1% to 1151.49 and other averages were off their earlier highes.

Stocks hesitated after the stronger-than-expected CPI data even as economists suggested the March CPI was influenced by seasonal factors, and is unlikely to influence monetary policy one way or another. "Fed policy will not be changed in any way whatsoever by this," says Moody's chief economist John Lonski.

Consumer prices jumped 0.6% in March, slightly above expectations for a 0.5% rise. As expected, the gains were driven by the surge in gasoline prices in March, together with higher apparel and medical costs.

But the biggest shocker came from the core CPI, which rose 0.4%, twice the rate economists were expecting, and the biggest jump in almost two years.

The culprit behind the surprise gain was a 3.9% surge in lodging costs. "It is possible that the early Easter explains the March leap -- hotels may have raised rates earlier thanusual," says HFE chief U.S. economist Ian Shepherdson. "Either way, this is not a sign of impending stagflation," i.e., an environment of sluggish economic growth and rising inflation.

Overall, the trailing 12-month rate of increase in core inflation is edging lower at 2.3% in March, compared with 2.4% in February. "Core inflation is just about right at 2% to 3%," says Moody's Lonski. "It's like blood pressure. You don't want it too high or too low."

In December 2003, core inflation was dangerously low, making it hard for businesses to pass on higher costs, Lonski recalled. Given rising energy and health care costs, businesses today need that margin.

Inflation concerns were raised after the

Federal Reserve

rang the alarm bells at its March 22 meeting. But since then, March's anemic payroll growth, sluggish retail sales and an ever-rising trade deficit have had economists revising their growth expectations downward.

At the Fed's next rate-setting meeting on May 3, economists still expect another 25-basis-point hike, which would bring the fed funds rate to 3%. But now that the slower growth has overshadowed inflation concerns, many are expecting the Fed to pause its rate-hiking pattern at least once, if not twice, during this year's other five meetings.

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