Updated from 8:35 a.m. EDT

Inflation remained benign last month, the government said, with the consumer price index expanding 0.6% overall and rising 0.2% excluding food and energy. While May's jump is the biggest expansion in more than three years, the headline number came in close to forecasts and helped allay concerns that price pressures would force the

Federal Reserve

into a panicked series of interest rate hikes.

Economists had forecast a rise of 0.5% in the overall CPI and a rise of 0.2% in the core number.

The Labor Department report sparked a rally in fixed-income markets, where many traders had gone short in expectations of a more bearish number. The 10-year Treasury note was recently up 27/32 to yield 4.76%. Stock futures firmed, with the

S&P 500

recently trading about 8 points above fair value while the

Nasdaq

was set for a 13-point jump.

The biggest driver of higher prices last month was energy, with the Labor Department's index for petroleum-based fuels rising 7.7% and the index for energy services rising 1.1%. Food prices rose 0.9% in May following increases of 0.2% in each of the three previous months, led by higher dairy prices. A deceleration in the cost of housing helped temper the core increase.

Year-over-year, consumer prices rose 3.1%, the biggest increase since June 2001.

May's numbers follow a series of cautious comments over the weekend from Fed officials, with several noting that a 1% fed funds rate was unsustainable. Jack Guynn, president of the Minneapolis Federal Reserve, said policymakers reserved the right to go back on their promise for a "measured" response to inflation, although he also gave assurances that there is no reason to panic now.

"When viewed in the historical context and measured in the aggregate, the rate of inflation we are currently seeing appears to be comparable to rates observed just prior to 2001," he said. "In my mind, these are acceptable levels for inflation and fall within my own definition of price stability.

"At the same time, I don't want to dismiss the compelling evidence of rising prices. As I have tried to suggest, a great deal depends on how much of the recent spate of price increases turns out to be transitory. And I would conclude that these recent developments on the price front warrant significant attention in our analysis and policy debates," Guynn said.