The Nasdaq and S&P 500 surged 2 percent on Wednesday after data showed US inflation slowed more than expected in July and raised hopes the Federal Reserve will become less aggressive on interest rates hikes.

A sharp drop in the cost of gasoline helped the US Consumer Price Index stay flat last month after advancing 1.3 percent in June, the Labour Department said. The CPI rose by a less-than-expected 8.5 percent over the past 12 months after a 9.1 percent rise in June.

The data was the first notable sign of relief for Americans who have watched inflation steadily climb the past two years.

"For the market, it's sort of a Goldilocks scenario right now because you have the labour market holding up and inflation potentially starting to come down. That is what a soft landing would look like," said Shawn Snyder, head of investment strategy at Citi US Wealth Management in New York.

But one month of slowing inflation is not enough for the Fed to send an all-clear signal, Snyder said.

"They're going to need to see a sustained trend, and even then some, to moderate monetary policy that could potentially lead to a recession," he said.

The Dow Jones Industrial Average rose 1.63 percent, to 33,310, while the S&P 500 gained 2.13 percent, to 4,210 and the Nasdaq Composite added 2.89 percent, to 12,855.

It was the biggest single-day gain for both the Nasdaq and S&P 500 in two weeks, and for the Dow in three weeks. It was the highest close for the S&P 500 since early May.

"(Inflation at) 8.5 percent is still very high, but there is optimism that perhaps June was the peak," said Randy Frederick, vice president of trading and derivatives for Charles Schwab.

High-growth and megacap technology stocks, whose valuations are vulnerable to rising bond yields, rose as Treasury yields fell sharply across the board. Apple, Alphabet, Amazon.com and Microsoft all rose more than 2 percent each.

Meta Platforms Inc jumped 5.8 percent after the Facebook parent said on Tuesday it had raised US$10 billion in its first-ever bond offering. (Reuters)