WASHINGTON -- Led by higher gasoline prices, consumer inflation shot up in November by the largest amount in more than two years.

In a troubling juxtaposition, the rise in inflation is coming at a time when economic growth is slowing sharply under the weight of a steep slump in housing and a severe credit crunch.

"We are in store for a period of very weak if not recessionary growth and uncomfortably high inflation," said Mark Zandi, chief economist at Moody's economy.com. "People are going to get hit with both a weaker job market and having to pay more to fill their gas tanks and buy groceries."

The Labor Department report Friday showed that its closely watched Consumer Price Index rose by 0.8 percent last month, the biggest increase since September 2005, as energy prices jumped by 5.7 percent, reflecting a huge gain in gasoline. Core inflation, which excludes energy and food, was also up last month, rising by 0.3 percent as the cost of clothing, airline tickets and prescription drugs all took big jumps.

The bad news on inflation sent stock prices lower. Investors worried that rising prices will keep the Federal Reserve from cutting interest rates quickly enough to prevent a recession. The Fed uses lower interest rates to stimulate a weak economy and higher rates to slow growth and keep inflation in check.

With the economy slowing at the same time that inflation is rising, the Fed could face a tough policy dilemma similar to the problems it faced in the 1970s when a series of oil shocks sent inflation soaring while the country struggled with weak economic growth. The combination of stagnant growth and inflation got branded as "stagflation."

The bad report on consumer prices followed a report Thursday showing that inflation at the wholesale level jumped by an even larger 3.2 percent in November, the biggest increase in 34 years.

The Fed cut a key interest rate by a quarter-point on Tuesday but failed to give a strong signal about future rate cuts, which sent the Dow Jones industrial average plunging by 294 points. However, investors were encouraged when the Fed on Wednesday joined with other central banks around the world to unveil new initiatives designed to combat a credit crunch that is weighing on economic activity as banks cut back on their lending.

Despite the higher inflation, many economists said they still believe the Fed will keep cutting interest rates.

"The danger associated with what is playing out in the credit markets will dominate the Fed's attention in the coming year," said Jim Glassman, senior economist at JP Morgan Chase & Co.

Still, Lyle Gramley, a former Fed governor and now an economist with the Stanford Financial Group, said there was a danger the Fed could respond too slowly because of a split among policymakers.

Federal Reserve Chairman Ben "Bernanke and others see an economy that is in danger of falling into a recession because of the credit crunch, but if you read the public speeches of some of the regional bank presidents, you would hardly feel there is anything wrong with the economy. They are very hawkish on inflation," Gramley said.

With one month to go, inflation in 2007 is rising at an annual rate of 4.2 percent, far above the 2.5 percent increase in 2006. The acceleration has been driven by energy prices, which are rising at an annual rate of 18.1 percent this year, compared to an increase of 2.9 percent in 2006.

The surge in inflation adds another risk to an economy that is already struggling under the weight of a meltdown in housing, a severe credit crunch and faltering consumer confidence. The worry is that the jump in energy costs will leave consumers with less money to spend on other items, worsening the economic slowdown.

A separate report showed that average weekly wages fell for a second straight month in November, after adjusting for inflation, and are now 0.8 percent lower than a year ago as workers' paychecks are not keeping up with the rise in inflation, a development contributing to rising voter unhappiness going into the 2008 elections.

"Today's data show that American workers' real earnings are down because the costs of gas, health care and food are rising faster than their wages," said Sen. Charles Schumer, D-N.Y.

Former Federal Reserve Chairman Alan Greenspan said in a National Public Radio interview broadcast Friday that the odds of a recession are "clearly rising" with economic growth "getting close to stall speed."

Many economists believe that economic growth in the current October-December quarter could fall below 1 percent at an annual rate, sharply below the 4.9 percent rate of growth in the third quarter.

Outside of food and energy, clothing prices, which have been falling most of this year, surged by 0.8 percent in November, the biggest rise since April 1999, while airline tickets jumped 2.6 percent and prescription drugs were up 0.8 percent.

In a separate report, the Fed said industrial production rose by 0.3 percent in November, a modest rebound following a big 0.7 percent fall in October.