NEW YORK, United States (AFP) -- Stocks in the United States and Europe slumped on Tuesday while the dollar climbed as data showed that US inflation slowed less than expected in January, diminishing chances of an early interest rate cut.

The closely watched Consumer Price Index (CPI) rose 3.1 percent from a year ago in January, down from 3.4 percent in December, the Labor Department said-- but analysts had predicted that the rate could fall below 3.0 percent.

Meanwhile, the core CPI reading that excludes volatile food and energy prices -- and which is more important to policymakers -- was steady at a 3.9 percent annual increase.

The US Federal Reserve has indicated it will likely begin to cut interest rates later this year, but Fed officials have continued to fixate on the central bank's two percent inflation target.

US Treasury bond yields jumped as futures markets shifted bets against central bank rate cuts in March and May.

"The January inflation report came in hot across the board and that has the potential to spook investors after a big rally over the last few months," said eToro analyst Bret Kenwell.

Stocks have been propelled to new heights in recent months as investors anticipate a drop in interest rates.

But Wall Street indices spent the entire day in the red, with investors seemingly using the inflation data as an opportunity to take profits. All three major indices dropped more than one percent.

The inflation report "just stretches out the whole process," said Maris Ogg of Tower Bridge Advisors, who described the CPI reading as a "blip."

"I don't see any reason why the economy wouldn't continue to do reasonably well," Ogg said.

Europe stocks closed down almost one percent.

In Asia, most of the region returned to work after a long weekend. Tokyo led advances thanks to a surge in shares of Japanese investment group SoftBank, which was boosted by another blockbuster day for its US-listed chip designer Arm.

Arm has almost doubled in value in the past week -- and tripled since its September listing -- owing to healthy demand for semiconductors fueled by an expected boom in artificial intelligence.

The dollar also pushed higher against the euro and other currencies following the CPI data.

"For a Fed that's been telling markets that rate cuts are on the way, even during the hiking cycle, this complicates matters as core inflation remains far away from the Fed's two percent target," said a note from James Stanley of Forex.com.