The U.S. dollar fell against a basket of major world currencies <.DXY> after the Labor Department said its highly anticipated Consumer Price Index increased 0.5 percent. Gold rebounded from losses as stocks swung higher.
The report increased the likelihood that the Fed will raise rates when policy-makers meet March 20-21 - even as U.S. retail sales posted their largest decline in 11 months.
The odds of a March rate hike rose 7 percentage points to 83.1 percent, according to the CME Group's FedWatch tool.
Shares in Europe gained more than 1 percent as did a gauge of global equity activity. Stocks on Wall Street opened lower but steadily climbed through the session after the initial shock of the big jump in monthly inflation was digested.
Joseph LaVorgna, chief economist for the Americas at French bank Natixis in New York, said inflation had to be put in context. The year-over-year rate on core inflation at 1.8 percent was still below the Fed's target of 2 percent, he said.
Excluding the volatile food and energy components, the CPI shot up 0.3 percent in January.
Monthly data tend to be noisy, said Phil Orlando, chief equity strategist at Federated Investors in New York.
"The market is doing exactly what the market does, it shoots first and asks questions later," Orlando said, adding investors are likely to remain jittery until the first Fed policy-setting meeting in March under new Chair Jerome Powell.
"There ought to be some chop to it as we're trying to figure out what's going on in the economy and how might the Fed adjust monetary policy under a new leadership team given the backdrop of macroeconomic data," Orlando said.
MSCI's all-country world index of stocks in 47 countries <.MIWD00000PUS> gained 1.42 percent while the pan-European FTSEurofirst 300 index <.FTEU3> of leading regional shares rose 1.03 percent to close at 1,469.00.
Paul Eitelman, an investment strategist at Russell Investments, said it was unlikely the Fed would increase its forecasted rate hikes as such a move would be a bit bold for a new Fed chief and likely be an over-reaction to one data point.
Shares in Europe rose after initial declines as solid corporate results and economic data kept investors confident.
Data earlier in the day showed Germany's economy was set to power ahead in 2018, while a Thomson Reuters study said fourth-quarter European earnings growth expectations were revised upwards after 15 weeks of downgrades.
The Dow Jones Industrial Average <.DJI> rose 253.38 points, or 1.03 percent, to 24,893.83. The S&P 500 <.SPX> gained 35.75 points, or 1.34 percent, to 2,698.69 and the Nasdaq Composite <.IXIC> added 130.11 points, or 1.86 percent, to 7,143.62.
German government bond yields hit their highest in more than two years. The yield on Germany's 10-year government bond <DE10YT=TWEB>, the benchmark for the region, reversed earlier declines and rose around 3 basis points to 0.774 percent - its highest level since September 2015, according to Tradeweb data.
Yields on the benchmark 10-year U.S. Treasury note hit a fresh four-year high. The notes <US10YT=RR> last fell 20/32 in price to yield 2.9131 percent.
The dollar index <.DXY> fell 0.8 percent, with the euro <EUR=> up 0.87 percent at $1.2457. The Japanese yen <JPY=> strengthened 0.77 percent versus the greenback to 107.01 per dollar.
Oil prices rebounded from earlier losses after U.S. crude stocks rose less than expected and Saudi Energy Minister Khalid al-Falih said major producers would prefer tighter markets than to end supply cuts too early.
U.S. crude inventories <USOILC=ECI> rose 1.8 million barrels last week, Energy Information Administration (EIA) data showed compared with expectations for an increase of 2.8 million barrels.
U.S. crude <CLcv1> rose $1.41 to settle at $60.60 per barrel and Brent <LCOcv1> settled up $1.64 at $64.36 per barrel.
U.S. gold futures <GCv1> for April delivery settled up $27.60 per ounce at $1,358.
(Reporting by Herbert Lash; Editing by Bernadette Baum, Nick Zieminski and Susan Thomas)
By Herbert Lash