By Eric Wallerstein, Akane Otani and Joe Wallace

U.S. stocks climbed Thursday after the latest inflation data showed cooling price pressures for the sixth consecutive month, likely keeping the Federal Reserve on track to slow its pace of interest-rate increases.

$S&P 500 index(.SPX.US)$ added 0.3%, while $Dow Jones Industrial Average(.DJI.US)$ gained 0.6%, or roughly 216 points. The technology-heavy $Nasdaq Composite Index(.IXIC.US)$ rose 0.6%. The indexes bobbed between small gains and losses for much of the morning before gaining steam midday.

Consumer-price inflation slowed to 6.5% in December, down from 7.1% in November, the Labor Department said. Despite landing largely in line with economists' expectations, one measure of services inflation -- excluding energy services and the cost of owning or renting a home -- offered encouragement that tighter monetary-policy is proving effective.

The so-called supercore inflation, flagged by Federal Reserve Chairman Jerome Powell as especially important given its sensitivity to labor costs, rose at a 3% annualized rate, well below the pace seen last year. Many economists have noted it is normal to see a delay in housing prices falling substantially.

In response to the data, traders grew more confident that the Fed is on course to slow its pace of tightening at its coming meeting. Wall Street widely expects the central bank to raise its benchmark rate target by a quarter of a percentage point to a range between 4.5% and 4.75% on Feb. 1.

The data was "a mixed bag when you dig into the nuance," said Andrew Patterson, senior economist at Vanguard. Mr. Patterson added that he will be closely watching Fed officials' comments between now and the end of the month to get a better sense of where the Fed might be headed.

Thursday's rally extends the S&P 500's gains for the month to nearly 4%. Energy stocks fared best of the index's 11 sectors, rising 1.9% alongside higher oil prices.

Investors bought U.S. Treasurys to reflect hopes for a lower-rate reality than forecast by central bankers, lifting bond prices and weighing on yields. The yield on the 10-year U.S. Treasury note slipped to 3.446% from 3.554% late Wednesday, while the yield on the two-year note -- which is more sensitive to monetary-policy expectations -- fell to 4.138% from 4.226%.

Market-based expectations are for the Fed to cut rates by roughly a half-percentage point in the latter half of the year, according to derivatives prices via FactSet. Yet some policy makers have pushed back on the chance of any rate decreases in 2023, saying borrowing costs will have to stay high for some time to bring down inflation.

"The market is battling against them," said Lyn Graham-Taylor, senior rates strategist at Rabobank. "It's easing financial conditions," when Fed officials want the opposite, he said.

Global investors wagered that a less-aggressive Fed would be a boon for assets that had suffered from the support rising rates provided for the dollar.

The yen rose 2.4% against the greenback, supported by speculation that the Bank of Japan could retreat from its ultra-lenient monetary policy. Front-month gold futures jumped 1.1% to $1895.50 a troy ounce, their highest close since April 2022.

The dollar extended recent declines. The WSJ Dollar Index lost 0.9%, falling 9% over the past three months. Speculators have piled into bets against the dollar and in favor of gold lately, hoping for a reversal of 2022's performances.

Options traders took a breath of fresh air after the print, seeing fewer catalysts to jostle stocks on the horizon. The Cboe Volatility Index, or the VIX, extended its longest lull since late 2021 by falling below 20 -- a key level typically seen as signifying lack of worry or complacency -- to 19.1.

Elsewhere, airline stocks received a boost from American Airlines' improved earnings guidance, which sent shares 9.7% higher. Brent crude-oil futures gained 1.6% to $84.03 a barrel.

Overseas markets were broadly higher. The Stoxx Europe 600 extended its strong start to the year, rising 0.8%, driven by real-estate and auto stocks.

In Asia, Hong Kong's Hang Seng rose 0.4%. Japan's Nikkei 225 was flat, and the Shanghai Composite Index rose less than 0.1%.