The government's report on inflation set off a few smoke detectors but no fire alarms yesterday, as consumer prices rose a feisty 0.6 percent in May but a much tamer 0.2 percent excluding the volatile food and energy sectors.

Economists said the report would justify the widely expected move by the Federal Reserve to raise short-term interest rates for the first time in four years when it meets at the end of this month, but added that it gave the policymakers breathing room to go easy.

"The important part is that the increase in consumer prices was in line with expectations," said Greg McBride, senior financial analyst with Bankrate.com in North Palm Beach, Fla.

That means the Fed doesn't have to boost the target federal funds rate, now at a 46-year low of 1 percent, by more than the expected quarter-point to choke off inflation, he said. "For the time being, [Fed members] can adhere to the measured pace they put forth as their preferred method."

Indeed, Fed Chairman Alan Greenspan reiterated yesterday the central bank's intention to raise rates gradually. "Inflationary pressures are not likely to be a serious concern in the period ahead," he added during testimony before the Senate Banking Committee. He is seeking a fifth term at the Fed.

Nevertheless, Greenspan said the Fed stood ready to move more aggressively if needed.

He also struck an optimistic note on the U.S. economy. "I think this particular recovery has some momentum in it and does not look to be short-lived."

Stock and bond markets rallied as inflation worries eased. The Standard & Poor's 500 Index gained 6.72, or 0.6 percent, to 1,132.01, while the Dow Jones industrial average advanced 45.70, or 0.4 percent, to 10,380.43. The Nasdaq Composite Index jumped 25.61, or 1.3 percent, to 1,995.60.

Still, rising consumer prices bear watching, Bankrate.com's McBride said.

"It's definitely something that's come to the forefront in the past couple of months," he said, noting that consumer prices have risen nearly 6 percent on an annualized basis over the last three months as gasoline and dairy prices surged.

The overall 0.6 percent rise in the Labor Department's Consumer Price Index followed a 0.2 percent increase in April and represented the biggest advance since January 2001.

Stripping out volatile food and energy, which tend to swing wildly and often are affected by short-term factors such as temporary shortages and surpluses that can change rapidly, the 0.2 percent rise in the "core" rate was down from a 0.3 percent gain in April.

"We know we have energy inflation, but it does not appear to be spreading into the rest of the economy," said Stuart Hoffman, chief economist at PNC Financial Services Group, Downtown. "I don't think a tidal wave of inflation is about to overtake us."

Since Memorial Day, gasoline prices have fallen an average of about 10 cents a gallon nationwide and are likely to drop further, particularly after Labor Day, easing overall inflation pressures, Hoffman said.

Hoffman is projecting an inflation rate this year of 2.5 percent to 2.75 percent vs. 1.9 percent last year.

"Inflation will be higher than last year, but it won't be running as hot for the whole year as it was [in the first half] when gasoline prices were flying," he said.

Meanwhile, workers gathering the courage to ask the boss for a raise to keep up with rising prices may be disappointed.

Even though the economy is growing and some companies are finding it easier to raise prices, "There's still a lot of excess capacity and people out of work and underemployed," McBride said.

Those conditions "don't really give workers a whole lot of bargaining power."