In economic news Wednesday, the consumer price index (CPI) rose a more-than-expected 0.6 percent in January, the largest monthly gain since February 2013. In the 12 months through January, the CPI increased 2.5 percent, the biggest year-on-year gain since March 2012.
After the inflation report, Goldman Sachs and JPMorgan economists increased their expectations for a rate hike as soon as March or May.
U.S. Treasury yields spiked following data releases, with the benchmark 10-year note yield breaking above 2.5 percent, while the shorter-term two-year note yield climbed to 1.26 percent.
The U.S. dollar traded lower against a basket of currencies, with the euro near $1.06 and the yen around 114.1 yen against the greenback.
Retail sales also beat expectations, with the headline number showing a 0.4 percent rise for January after an upwardly revised 1 percent gain in December. The so-called core retail sales, excluding automobiles, gasoline, building materials and food services, posted a 0.4 percent rise.
"This market, for a long time, was hungry for a growth story," said Jim Davis, regional investment manager for The Private Client Group of U.S. Bank. "Every time we get a number supporting that, more people jump on the bandwagon."
Meanwhile, Federal Reserve Chair Janet Yellen testified in front of Congress for the second straight day. She acknowledged the economy is weak, but Fed policies have helped and the economy is close to achieving the Fed's goals on employment and inflation.
On Tuesday, Yellen lifted market expectations for a March rate hike after saying it would be "unwise" for the Fed to wait too long.
"Our view is the over/under on rate hikes for this year is at two. But the data continue to come in stronger," said Michael Collins, senior investment officer at PGIM Fixed Income. "I think it gives the Fed more room to act how they've communicated."
"But there are still a lot of risks in the global economy, and in the U.S. there is some policy risk," he said.
Other data released include business inventories for December, which rose 0.4 percent, and the February read on U.S. home builder sentiment, which showed a decline.
"You can see that the picture is changing as inflation has picked up over in China and this is having a more prominent impact over in the U.S.," said Naeem Aslam, chief market analyst at Think Markets, in a note. "The U.S. retail sales data was hot and it tells us how much investors are willing to dig deep into their pockets and how confident they are in their spending attitude."