(AP) -- Asian shares advanced on Thursday after U.S. stocks rallied to records on hopes that inflation is heading back in the right direction.

The optimism came from a report showing U.S. consumers had to pay prices for gasoline, car insurance and everything else in April that were 3.4% higher overall than a year earlier. While that's painful, it's not as bad as March's inflation rate of 3.5%.

The slowdown was a relief after reports for the consumer price index, or CPI, earlier this year had consistently come in worse than expected. Wednesday's report built on expectations that the Federal Reserve might cut its main interest rate this year, the major preoccupation for most investors.

In Asian trading, Tokyo's Nikkei 225 index gained 0.8% to 38,676.83 even after the government reported that the Japanese economy contracted at a 2% annual rate in the January-March quarter.

Hong Kong's Hang Seng index rose 1.6% to 19,369.06 and the Shanghai Composite index added 0.5% to 3,134.97.

In Australia, the S&P/ASX 200 advanced 1.6% to 7,874.70 while South Korea's Kospi climbed 0.8% to 2,751.32.

Taiwan's Taiex was up 0.7% and the Sensex in India gained 0.5%.

On Wednesday, the S&P 500 jumped 1.2% to top its prior high set a month and a half ago, closing at 5,308.15. The Dow Jones Industrial Average added 0.9% to 39,908.00, and the Nasdaq jumped 1.4% to 16,742.39, adding to its own record set a day earlier.

Stocks that tend to benefit the most from lower interest rates helped lead the market. Homebuilders gained on hopes that cuts by the Fed could lead to easier mortgage rates, with Lennar, D.R. Horton and PulteGroup all rallying more than 5%. Big Tech and other high-growth stocks also rode the wave of expectations for lower rates, and Nvidia's gain of 3.6% was the strongest force pushing the S&P 500 upward.

Real-estate stocks in the S&P 500 climbed 1.7%, while stocks of electricity companies and other utilities rose 1.4%. The dividends they pay look better to investors when bonds are paying less in interest.

On Wall Street, Petco Health + Wellness helped lead the market after soaring 27.9%. It named Glenn Murphy, who is CEO of investment firm FIS Holdings, as its executive chairman.

On the losing end were GameStop and AMC Entertainment, as momentum reversed following their jaw-dropping starts to the week. GameStop fell 18.9%, though it's still up 126.5% for the week so far.

AMC Entertainment sank 20% after it said it will issue nearly 23.3 million shares of its stock to wipe out $163.9 million in debt.

A separate report Wednesday showed no growth in spending at U.S. retailers in April from March. Economists had expected 0.4% growth.

Slowing retail sales could be seen as a positive for markets, because it could reduce the upward pressure on inflation. But weaker U.S. consumer spending would erode one of the main pillars keeping the economy out of a recession. Pressure has grown particularly high on lower-income households.

In the bond market, the yield on the 10-year Treasury eased to 4.34% from 4.45% late Tuesday. The two-year yield, which moves more closely with expectation for Fed action, sank to 4.72% to from 4.82%.

Traders are now forecasting a nearly 95% probability that the Fed cuts its main interest rate at least once this year, according to data from CME Group. That's up from just below 90% a day before.

In other trading early Thursday, U.S. benchmark crude oil picked up 42 cents to $79.05 per barrel in electronic trading on the New York Mercantile Exchange. It gained 61 cents on Wednesday.

Brent crude, the international standard, was up 39 cents at $83.14 per barrel.

The U.S. dollar fell to 154.03 Japanese yen from 154.88 yen. The euro rose to $1.0888 from $1.0885.