January's hotter-than-expected consumer price index reading pushes the economy closer to a potential danger zone for the stock market.

Prices rose 2.1 percent over the past year, the same as December but more than what Wall Street had expected and at a particularly ticklish time.

This year's wicked market swings have been fed in large part by inflation fears. Rising price pressures have generated worries that the Federal Reserve might have to play catch-up on rate hikes, and Wednesday's data reinforced that perception.

While the sustained pace above 2 percent might not be cause for immediate concern, a rise in inflation toward the 3 percent level would be, according to Jim Paulsen, chief investment strategist at Leuthold Group.

Research going back to 1870 shows that as inflation morphs from 2 percent to 3 percent, investors get more sensitive to rate increases and the normal correlation of risking stocks and rising yields breaks down.

"This implies that good news may continue to be bad and any further rise in yields should prove increasingly challenging for the stock market," Paulsen told clients in a note Monday.

Reached Wednesday after the CPI release, Paulsen said the inflation numbers coupled with an unexpected 0.3 percent January retail sales decline raised the ugly specter of stagflation. The term, a market bugaboo in the 1970s, refers to high inflation and lower economic growth otherwise.

"Expectations are so high for growth. What happens if we not only get a little trickle of inflation but we start to get weaker-than-expected real growth numbers?" he said. "I'm not saying we're going to have big stagflation, but we may have to revise down aggressive growth for the year."

Paulsen wasn't alone: David Rosenberg, chief economist and strategist at Gluskin Sheff, said in his daily note that the economy was seeing "stagflation, or at least a mild case of it," based on the difference between the retail sales and CPI readings.