SAN FRANCISCO -- While pundits bicker about inflation risk, today's market action indicates that the

fear

of inflation had become very real, indeed. The session's surprisingly strong gains in both equities and bonds came on the heels of a weaker-than-expected

consumer price index report, which allayed simmering concerns about inflation.

The

Dow Jones Industrial Average

soared 343.15, or 3.2%, to 11,216.12, its fifth-biggest point gain ever and first close above 11,000 since Sept. 14. The

S&P 500

rose 2.8%, and the

Nasdaq Composite

gained 3.9%. The price of the benchmark 10-year Treasury bond rose 12/32 to 96 18/32, its yield falling to 5.46%. The 30-year rose 21/32 to 93 6/32, its yield falling to 5.86%.

The CPI rose 0.3% in April, below the consensus expectation for a 0.4% rise and "whispers" of as much as a 0.5% spike. Core CPI, which excludes food and energy, rose 0.2%, in line with expectations. The data helped calm inflation concerns among skittish investors, especially in the bond market.

"Despite the recent selloff in the bond market, which has worried investors that there may be an inflation problem in the economy, we do not see this to be the case," Bruce Steinberg, chief economist at

Merrill Lynch

, commented in the wake of the CPI report. "We believe that inflation will continue to ease as we proceed through this year and into next year."

Like many on Wall Street, Steinberg also took heart in the stronger-than-expected

housing starts data reported this morning. Buyers were enlivened that the CPI showed inflation contained, while the housing numbers demonstrated that a key sector of the economy remains robust; for bulls, it was the best of both worlds.

Despite the bravado regarding inflation expressed by most Wall Street participants, equity investors clearly found inspiration in the bond market's rally today. A corollary to the inflation story is the fact that bonds directly influence equity valuations, as I

mentioned last night. Rising bond yields can present competition for stocks, and also undermine the future value of corporate earnings and dividend payments. (For a more in-depth review of these relationships, go

here.)

I want to avoid the trap of dismissing economic data that doesn't support my viewpoint, as those who discount inflation's threat are wont to do. But a look inside today's CPI report suggests it is premature to become sanguine about inflation. Still, my intent is not to disparage today's impressive rally. I remain in the

bullish camp, in part because I don't think inflation concerns will overshadow concerns about economic weakness until later this year. (Notably, Lakshman Achuthan from the

Economic Cycle Research Institute

(ECRI) appeared to be backing away from the firm's prior

"unavoidable" recession call on

CNBC

today. Maybe next time he'll alter the view about inflation not being a threat.)

As for the CPI, a big decline in apparel costs shaved 0.1% off the index. The housing component rose just 0.1% thanks to another dip in utility and fuel costs, but it's hard to expect lower energy costs going forward (especially here in California). Also, shelter costs actually increased 0.3% in April because of rising rents. Additionally, recreation costs rose 0.9% last month, while medical costs rose 0.4% and are now up 4.6% vs. year-ago levels.

"Sharply rising medical costs are pushing employment costs higher and is one key reason for the recent uptick in core inflation," commented Tony Crescenzi, CEO of

BondTalk.com

. "No relief is in sight in this arena. The waning of this key inflation suppressant supports the notion that the secular forces on inflation are now working in favor of an acceleration in inflation."

Crescenzi, who described yesterday's

statement by the

Federal Reserve as "essentially a gift to the stock market but a snub to worried bond investors," noted that health insurance premiums in 2001 are expected to replicate last year's near double-digit increase.

He also pointed out that overall CPI is up 3.8% so far this year and the core rate is up 3.3%. "For the Fed, today's data might seem to vindicate their stated view that inflation remains contained ... but the markets beg to differ," he wrote.

As for what the market is saying, the bond strategist mentioned long-term bond yields being at their highest levels in six months heading into today, while the

Journal of Commerce-ECRI Industrial Price Index

hit a three-month high yesterday (the index fell 0.2 to 85.3 today). Also, rallying cyclical stocks are outperforming, he wrote, "further indicating that investors are broadly betting on an economic rebound."

The

Morgan Stanley Cyclical Index

rose 4.3% today and is at a 15-month high. (To be fair, the

S&P Barra Growth Index

rose 3.4% today, outperforming its value counterpart, which rose 2.4%.)

Then, there's gold stocks, which continued their recent rally today; the

Philadelphia Stock Exchange Gold & Silver Index

rose 5.9%.

Tune in tomorrow morning before the opening bell for more on gold.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.