US inflation rose at its fastest pace in two years during November, spurred on by higher energy prices, according to figures from the Labor Department.
There are fears that higher energy prices will dent consumer spending
Consumer prices rose 0.8% in November from October, above market forecasts.
The figures come as US and UK central banks have been cutting interest rates to bolster weakening economic growth.
The higher than expected inflation figure saw the dollar post its biggest one-day rise against the euro in more than three years.
This is because traders now expect the Federal Reserve to delay any further rate cuts.
By late Friday afternoon trading in New York, the euro was down 1.5% to $1.4412 against the dollar.
This is the strongest the dollar has been against the single European currency since October.
"The fear is that inflation will become the bigger concern," said John Forelli of Independence Investment in Boston. "It would be a lot easier to carry out their plans if inflation was not a concern."
US shares fell on concerns that the Federal Reserve would now not cut interest rates. That expectation helped strengthen the US dollar as investors looked for assets in currencies that offered higher returns.
Earlier on Friday, a report showed that inflation in the eurozone, which covers the 13 nations that use the single European currency, also surged.
According to figures from Eurostat, consumer prices rose 3.1% in November compared with the same month in 2006, the biggest rise in more than six years and up from October's 2.6%.
Central banks are battling to keep inflation in check as a slump in the price of the US dollar, and higher energy costs have pushed up prices.
However, at the same time they are also trying to limit the impact of a global credit crunch caused by problems in the US mortgage market.
There are fears that the high energy costs and problems in the financial markets will act as a brake on consumer spending, and hamper economic growth.
Analysts said that central banks including the US Federal Reserve will have a number of factors to consider when setting borrowing costs in coming months.
"The data highlights the huge dilemma the Fed is under between trying to quell the financial dislocations in the market, easing policy, all the while inflation rates are starting to climb higher," said Kim Rupert at Action Economics.
"It's going to be a difficult road."
The last time US inflation rose by such a large amount on a monthly basis came after an energy shortage in the wake of hurricane Katrina in September 2005.
As well as energy, the cost of clothing, airline tickets and medication also rose in November in the US.
Consumer prices increased 4.3% on a yearly basis - the most dramatic rise since June 2006.
While the US central bank has cut interest rates three times in recent months to boost the economy, analysts suggest that these figures will make another interest rate cut less likely.
For the year to date, inflation is at 4.2% - compared with 2.6% in the same month in 2006.
Separate figures from the Fed on Friday showed further evidence that the economy may not be slowing as quickly as first thought, analysts said.
Industrial production rose 0.3% in November, reversing October's 0.7% drop, the Fed said. This reversal stemmed from higher output at auto factories, contributing to the overall 0.4% rise in manufacturing output.