US stocks drift near their record following an encouraging inflation update

NEW YORK (AP) — U.S. stocks are drifting near their record on Wednesday after a report suggested President Donald Trump’s tariffs are not pushing inflation much higher, at least not yet.

The S&P 500 was down 0.1% in afternoon trading and is just 1.8% below its all-time high set in February. The Dow Jones Industrial Average was up 94 points, or 0.2%, as of 12:24 p.m. Eastern time, and the Nasdaq composite was 0.2% higher.

The action was a bit stronger in the bond market, where Treasury yields eased after a report showed inflation ticked up by less last month than economists expected. U.S. consumers had to pay prices that were 2.4% higher overall in May than a year earlier. That was up from April’s 2.3% inflation rate, but it wasn’t as bad as the 2.5% that Wall Street was expecting.

A fear has been that Trump’s wide-ranging tariffs could ignite another acceleration in inflation, just when it had seemed to get nearly all the way back to the Federal Reserve‘s 2% target from more than 9% at its peak three summers ago.

It hasn’t happened, though economists warn it may take months more to feel the full effect of Trump’s tariffs. For the time being, many businesses may be pulling products they already had in their inventories rather than passing along higher costs from fresh imports.

“Another month goes by with little evidence of tariffs, but the longer-term inflation challenge they pose remain,” according to Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.

Financial markets also had only modest reactions to the conclusion of two days of trade talks between the United States and China in London.

Trump said Wednesday that China will supply rare-earth minerals and magnets to the United States, while his country will allow Chinese students into U.S. universities in a deal that still needs an agreement by him and by China’s leader. Trump also said that “President XI and I are going to work closely together to open up China to American Trade. This would be a great WIN for both countries!!!”

Investors are still hoping for a more sweeping trade deal that would ease tensions between the world’s two largest economies.

Hopes for such deals between the United States and countries around the world have been one of the main reasons the S&P 500 has charged nearly all the way back to its all-time high after dropping roughly 20% below a couple months ago. Without them, the fear is that Trump’s high tariffs could drive the economy into a recession while pushing inflation higher.

On Wall Street, Chewy dropped 9.3% after the seller of pet supplies reported a weaker profit for the latest quarter than analysts had forecast. Expectations were high after its stock had already rallied nearly 37% coming into the day for the year so far.

Tesla helped support the market after rising 1.7%. It’s been recovering much of its big losses taken last week after Elon Musk’s relationship with Trump imploded, which in turn raised fears about a loss of business for the electric-vehicle company. Musk on Wednesday backed away from some of his earlier comments and said they went “too far.”

In the bond market, the yield on the 10-year Treasury eased to 4.43% from 4.47% late Tuesday. Shorter-term yields, which more closely track expectations for what the Fed will do with overnight interest rates, fell more.

Wednesday’s better-than-expected reading on inflation raised expectations along Wall Street that the Fed could cut its main interest rate at least twice by the end of the year.

The Fed has been keeping interest rates steady so far this year, going on pause after cutting rates at the end of last year. It has been waiting to see how much Trump’s tariffs raise inflation because cutting interest rates could push inflation up even more, as they give the economy a boost.

“The Fed could be justified in doing some preemptive rate cuts,” said Brian Jacobsen, chief economist at Annex Wealth Management. “They were afraid that inflation would rise before growth would slow, but the script has been flipped and they will likely change their tune.”

In stock markets abroad, indexes fell across much of Europe and rose in Asia. South Korea’s Kospi was one of the best performers and jumped 1.2%.