Did you hear that whooshing sound yesterday morning? That was the sound of investors exhaling.

The collective sigh of relief over a relatively tame U.S. consumer price index report filled the sails of North American stock markets yesterday, blowing off concerns that swelling inflationary pressures would soon force a rapid rise in U.S. interest rates to contain them. Though some afternoon profit-taking tempered the gains in New York, the day's upbeat tone definitely implied that, at least for the time being, those rate fears are off the front burner.

The Dow Jones industrial average rose as much as 93 points at its high for the day, before closing at 10,380.43, up 45.70 points. The S&P 500 rose 6.72 points to 1,132.01, while the Nasdaq Stock Market composite index gained 25.61 points to 1,995.60.

The Toronto Stock Exchange also got a big lift from the U.S. CPI data, as the S&P/TSX composite index surged 97.93 points to 8,390.24. Key cyclical sectors, which have been hurt by recent interest-rate-related selling, were the biggest gainers: Base metal stocks rose 2.9 per cent, technology stocks gained 2.6 per cent and energy stocks climbed 2.1 per cent.

Toronto's heavily weighted gold sector also rose 2.1 per cent as the price of bullion jumped $4.50 (U.S.) to $388.70 an ounce in New York. Gold was lifted by a drop in its market foil, the U.S. dollar, fuelled by the declining expectations for a rapid rate escalation.

On the surface, the CPI data hardly looked like a recipe for relief from the inflationary hand-wringing. After all, CPI was up 0.6 per cent in May from April -- hardly a minuscule monthly gain, and one that exceeded economists' consensus estimate of 0.5 per cent. It also pushed the year-over-year CPI inflation rate to 3.1 per cent, the sort of number big enough to turn economists' heads.

But it's not this headline number that gets the attention of the interest-rate policy makers at the U.S. Federal Reserve Board; their attention is focused on the so-called "core" CPI, and that number looked much, much tamer.

The core measure, which excludes the volatile (and, in the case of May, sharply rising) food and energy segments, was up a mere 0.2 per cent in the month, bang-on the official consensus estimates, and 1.7 per cent year over year. After some strong U.S. economic indicators, culminating in Monday's sharp rise in retail sales, experts had been bracing for a core CPI above the estimates; hitting the target was about as positive a development as anyone had anticipated.

The CPI news quickly put an end to any talk that the Fed would raise the federal funds rate by 50 basis points, rather than 25 points, at its next scheduled rate policy meeting June 30. (A basis point is 1/100th of a percentage point.)

"If the Fed were looking for a reason to tighten more than 25 basis points in June, this was not the report," said economists Jose Rasco and David Rosenberg of Merrill Lynch in a report yesterday.

Indeed, the tame numbers allowed Fed chairman Alan Greenspan to reiterate a mantra that is music to the ears of equity markets: that interest rates can rise at a "measured" pace.

"Our general view is that inflationary pressures are not likely to be a serious concern in the period ahead, and therefore we concluded in our policy statements that the removal of an increasingly unnecessary degree of accommodation in monetary policy is very likely to be measured over the quarters ahead," Mr. Greenspan told the Senate banking committee in testimony related to his nomination to the chairmanship for a fifth term.

But how can the markets simply ignore rising prices in energy (up 4.6 per cent in May) and food (up 0.9 per cent)? Aren't these necessities that affect all consumers?

Well, yes. But they have historically been susceptible to sharp, short-term moves that can distort the underlying inflationary trend, and therefore can fool central banks into making rate moves based on inflation mirages. The price of oil, a key driver in May's bigger-than-expected headline number, is a case in point.

Oil has already backed well off the record peaks it hit last month: Crude futures in New York closed yesterday at $37.19 a barrel, off 12 per cent from the high of $42.38 hit on June 1 and down 8 per cent from May's average price of $40.28. Given that a 10-per-cent move in the price of crude equates to about three-quarters of a percentage point in annualized CPI growth, the price declines this month should take considerable heat off the headline inflation number for June.

David Parkinson is the investment editor of Report on Business.

dparkinson@globeandmail.ca