Dow Jones Industrial Average Slumps As Fed Rate Hike Looks More Likely After Strong Economic Data

This story was updated at 4:20 p.m. EDT.

U.S. stocks tumbled in afternoon trading on Tuesday as upbeat consumer price data pointed to a steady buildup in inflation, boosting chances of an interest rate hike later this year.

The Labor Department said the Consumer Price Index increased 0.4 percent last month, the largest gain since February 2013, after rising 0.1 percent in March. That took the year-on-year increase in the CPI to 1.1 percent from 0.9 percent in March.

"This morning the economic news was generally favorable, suggesting that ... the U.S. economy has improved to levels warranting something other than crisis-level rates," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis.

The major U.S. stock market indexes slid back after rallying sharply on Monday. The Dow Jones Industrial Average was down 181 points, or 1 percent, at 17,530 by the close of trading, while the S&P 500 was down 19 points, or 1 percent, at 2,047, and the Nasdaq composite index was off 60 points, or 1.3 percent, at 4,716.

In general, higher interest rates make stocks less attractive investments relative to bonds.

Investors are closely watching data to assess when the U.S. Federal Reserve will raise interest rates. While some Fed officials have suggested two hikes this year, traders are pricing in only one hike by the end of the year.

The Fed could still raise rates two or three times this year, San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart, both nonvoting members, said in a joint appearance in Washington on Tuesday.

Financial markets do not expect the Fed to hike rates again before September, given sluggish growth at the beginning of the year.

While the labor market has gained strength, inflation has stubbornly remained below the Fed's 2 percent target.

"Equities are generally expected to trend sideways for about a month or so since June will be a pivotal month with a bias towards caution," Sandven said.

Procter & Gamble Co's 1.2 percent fall weighed the most on the sector. Retail stocks fell last week after a string of disappointing results from department stores such as Macy's Inc. and Nordstrom Inc.

Home Depot Inc.'s shares, which have gained 16 percent in the past year, slipped 3 percent to $132 despite the home improvement company raising its full-year forecast. The stock was the biggest drag on the Dow and the S&P.

AbbVie was down 4 percent at $60 after Coherus said the U.S. Patent and Trademark Office agreed to review its petition to make a copy of AbbVie's top-selling drug. Coherus was up 16 percent at $19.

Pandora jumped 6 percent to $11 after activist hedge fund Corvex Management disclosed a stake and urged the company to sell itself.

Data from Reuters were used to report this story.