NEW YORK (AP) — Stocks rallied to three-month highs on Wall Street Wednesday as investors welcomed a government report showing that inflation cooled more than expected last month.

The encouraging inflation update sparked speculation that the Federal Reserve may not have to remain as aggressive about hiking interest rates as feared. The central bank has been raising rates in an effort to slow the economy in the hopes of stamping out inflation, but that risks bringing on a recession if the Fed moves too aggressively.

The S&P 500 rose 87.77 points, or 2.1%, to 4,210.24. The gains broke a four-day losing streak and pushed the benchmark index to its highest levels since early May. It is now nearly 15% above its mid-June low.

The Nasdaq composite, whose many high-growth and expensive-looking stocks have been particularly vulnerable to interest rates, jumped 360.88 points, or 2.9%, to 12,854.80. It's up more than 20% from June.

The Dow Jones Industrial Average rose 535.10 points, or 1.6%, to 33,309.51.

Technology stocks, cryptocurrencies and other of the year's hardest-hit investments were some of the day's biggest winners. Bitcoin rose 2.2% to just under $24,000.

Lower prices for gasoline and oil was responsible for much of last month's inflation surprise. But even after ignoring that and volatile food prices, so-called "core inflation" held steady last month instead of accelerating as economists had forecast.

The data encouraged traders to scale back bets for how much the Fed will raise interest rates at its next meeting. They now see a hike of a half percentage point as the most likely outcome, according to CME Group. A day earlier, they were betting on a more aggressive hike of 0.75 percentage points, the same as the last two increases.

Such differences may not sound like much, but interest rates help set where prices go across financial markets. And higher rates tend to pull down prices for everything from stocks to commodities to crypto.

Prices for bonds soared immediately after the inflation report's release, pulling their yields lower. The yield on the two-year Treasury, which tends to track expectations for the Fed, fell to 3.19% from 3.27% late Tuesday.

The 10-year yield initially fell, though stabilized later in trading. It edged higher to 2.79% from 2.78% late Tuesday. It remains below the two-year yield and many investors see such a gap as a fairly reliable signal of a coming recession.

Recession worries have built as the highest inflation in 40 years squeezes households and corporations around the world. Wall Street is closely watching to see if the Fed can succeed in hitting the brakes on the economy and cooling inflation without veering into a recession.

"It's a very knife edge type of path that they are trying to tread here," said Brian Nick, chief investment strategist at Nuveen.

To be sure, inflation is still painfully high, and the expectation is for it to stay so for a while. But Wednesday's data nevertheless rejuvenated Wall Street, which staggered following a stronger-than-expected jobs report on Friday that raised expectations for a more aggressive Fed. It bolstered hopes that a peak in inflation — and thus in the Federal Reserve's most aggressive rate hikes — may be on the horizon.

"This is a step in the right direction but keep in mind we have many miles ahead of us before inflation normalizes," said Mike Loewengart, managing director, investments strategy, at E-Trade from Morgan Stanley.

The Federal Reserve will get a few more highly anticipated reports before its next announcement on interest rates Sept. 21, which could also alter its stance. Those include reports showing hiring trends across the economy due Sept. 2 and the next update on consumer inflation coming on Sept. 13.

More immediately, reports this week will show how inflation is doing at the wholesale level and whether U.S. households are still ratcheting down their expectations for coming inflation, an influential data point for Fed officials.

Wednesday's inflation data nevertheless helped stocks across Europe climb to modest gains, while markets that closed earlier in Asia were mostly down. Germany's DAX returned 1.2%, Japan's Nikkei 225 fell 0.6% and Hong Kong's Hang Seng lost 2%.

On Wall Street, companies in the housing industry were strong on hopes that a less aggressive Fed could mean less pressure on mortgage rates. Homebuilder D.R. Horton gained 4.7%, PulteGroup rose 4.6% and Lennar was 3.6% higher.

Cruise lines and other travel-related companies also made big gains. Carnival rose 9.2% and American Airlines rose 3.1%.

Netflix, a formerly high-flying and high-growth stock that has plunged to be this year's worst in the S&P 500, was up 6.2% though it remains down by nearly 60% for 2022.

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AP Business Writer Joe McDonald contributed.