NEW YORK (AP) — U.S. stocks climbed Wednesday following a surprisingly encouraging update on inflation and a reassurance that the Federal Reserve still sees a cut to interest rates as likely this year.

The S&P 500 added 0.9% to its all-time high set a day earlier. The Nasdaq composite also built on its own record and jumped 1.5%, while the Dow Jones Industrial Average lagged the market with a dip of 35 points, or 0.1%.

The action was even stronger in the bond market, where Treasury yields dropped after the inflation report showed U.S. consumers paid prices that were 3.3% higher for food, insurance and everything else last month from a year earlier. Economists had been expecting to see the inflation rate stuck at 3.4%.

For Wall Street, a slowdown in inflation not only helps U.S. households struggling to keep up with fast-rising prices, it also opens the door for the Federal Reserve to cut its main interest rate. Such a move would ease pressure on the economy and give a boost to investment prices.

Everything from bitcoin to gold to copper rallied after the inflation data raised expectations for coming cuts to interest rates. A measure of nervousness among investors in U.S. stocks also eased.

For its part, the Federal Reserve kept its main interest rate steady on Wednesday following its latest policy meeting.

Policymakers welcomed the latest update on inflation, but "we'll need to see more good data to bolster our confidence," Fed Chair Jerome Powell said. He repeated the Fed's mantra that it needs an accumulation of data showing inflation is sustainably heading toward its 2% target before it lowers the federal funds rate, which is at the highest level in more than two decades.

"We'll have to see where the data lights the way," he said, reiterating the Fed's commitment to moving based on where incoming reports steer it.

The Fed is in a tight spot with a lot on the line. Cutting interest rates too soon or by too much could allow inflation to reaccelerate, while waiting too long would put unnecessary pain on the economy.

"It's a consequential decision for the economy, and you want to get it right," Powell said.

The Fed indicated Wednesday that most of its policymakers are forecasting one or two cuts to interest rates at some point this year. They also raised their forecasts for the number of cuts in 2025.

Fed officials trimmed their forecast for the number of cuts in 2024 down from a median of three after progress seemed to stall early this year on bringing inflation lower. Such a fall-off was widely expected, and traders are still largely betting on the first of potentially two cuts to rates in 2024 coming in September, according to data from CME Group.

That had areas of the stock market that tend to benefit most from lower interest rates doing the best.

Smaller companies that need to borrow to grow and can therefore feel the pinch of higher interest rates more than larger rivals led the market. The smaller stocks in the Russell 2000 index jumped 1.6%.

Lower interest rates could also mean easier mortgage rates and inject energy into the housing market. Homebuilder D.R. Horton climbed 3%. Builders FirstSource, which sells vinyl windows, custom millwork and other building materials, jumped 5.3%.

Oracle helped lead Wall Street higher with a leap of 13.3% even though it reported weaker profit for the latest quarter than analysts expected. Financial analysts pointed to strong bookings, including contracts related to artificial-intelligence training.

A furor around AI has helped send stocks to records despite worries about high interest rates and the slowdown in the economy that they induce. Nvidia again was the strongest force pushing the S&P 500 higher, with a gain of 3.5%. The chip company has become the poster child of the AI rush, and its total market value has topped $3 trillion.

Apple was nearly as strong a force pushing up on the S&P 500 as Nvidia after rising 2.9%. Its stock has been jumping the last two days after getting a cool initial reception to the announcement of several AI-related offerings coming to its operating systems.

All told, the S&P 500 rose 45.71 points to 5,421.03. The Nasdaq gained 264.89 to 17,608.44, and the Dow dipped 35.21 to 38,712.21.

In the bond market, the yield on the 10-year Treasury fell to 4.32% from 4.40% late Tuesday and from 4.60% a couple weeks ago. The two-year Treasury yield, which more closely tracks expectations for the Fed, slumped to 4.75% from 4.83% late Tuesday. Yields had been down even more earlier in the day.

In stock markets abroad, European indexes rallied following the release of the encouraging U.S. inflation data. In Asia, where markets closed before the data came out, indexes were mixed. Japan's Nikkei 225 index lost 0.7% as investors wait for the Bank of Japan's latest announcement on interest rates due Friday.

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AP Business Writers Matt Ott and Elaine Kurtenbach contributed.