WASHINGTON (AP) – Gasoline prices are up. So are airline fares and hospital costs.

In fact, inflation outside of food and energy is rising at the fastest pace in more than a decade, the government reported Wednesday.

But because the news was not as bad as had been feared, a relieved Wall Street rallied. The Dow Jones industrial average rose by 110.78 points, after declines fueled by inflation worries in six of the past seven trading days.

The Labor Department’s Consumer Price Index showed prices rising by 0.4 percent in May, the third consecutive sizable gain. Investors were relieved that the price pressures were not as widespread as had been imagined.

Many economists said they now believe the Federal Reserve will be content to raise interest rates just once or twice before finally ending their two-year credit-tightening campaign.

“The discouraging thing is that the Fed will tighten at the end of the month. The encouraging thing is that it may be the last rate hike for a while,” said Mark Zandi, chief economist at Moody’s Economy.com.

The 0.4 percent increase in the CPI was in line with expectations.

Core inflation, which excludes food and energy, rose by 0.3 percent, slightly worse than expected. Much of the jump was blamed on a statistical quirk in how the government measures shelter costs.

It was the third straight 0.3 percent gain and translated into an annualized increase of 3.8 percent over the past three months, the fastest pace since 1995.

Economists who believe the Fed is close to ending its rate increases pointed to a second report – the Fed’s latest survey of business conditions around the country. It showed the economy has slowed in recent weeks, a development the central bank is trying to engineer with those increases as a way to contain inflation.

Gasoline prices were up 4.9 percent last month following an 8.8 percent jump in April. Those gains have pushed pump prices above $3 per gallon in parts of the country.

Federal Reserve Chairman Ben Bernanke contributed to a 199-point market drop on June 5 when he called recent increases in core inflation “unwelcome developments” and signaled the Fed stood ready to raise rates further to fight inflation.

When he made that comment, the three-month average for core CPI inflation was 3.2 percent; the Fed’s comfort zone is 1 percent to 2 percent for increases in core inflation.

The Fed is expected to boost its target for the federal funds rate, now at a five-year high of 5 percent, to 5.25 percent at the June 28-29 meeting.

Some economists said they expected a final increase of one-quarter of a percentage point at the August meeting. That would allow Bernanke, who took over from Fed chief Alan Greenspan in February, to prove his inflation-fighting mettle.

“He will be able to convince the markets that he means business in terms of price stability,” said David Jones, head of DMJ Advisors, a Denver-based economic consulting firm.

For President Bush, voters’ unhappiness over soaring gas prices has helped send his approval ratings to record lows. He told reporters at the White House that he had confidence the Fed would do its job to keep inflation from becoming a problem.

“Monetary policy will pay attention very carefully to the signs, inflationary signs – that’s Ben Bernanke’s job,” Bush said Wednesday.

If inflation does not moderate, the Fed may be forced to slam even harder on the brakes, raising the risks of a more severe slowdown and possibly even a recession.

Concerns about a slowdown in the world’s largest economy have roiled financial markets.

Overall, consumer prices through May have risen at an annual rate of 5.2 percent, compared with a 3.4 percent gain for all of 2005. Excluding food and energy, core consumer prices are up at an annual rate of 3.1 percent through May, an acceleration from 2.2 percent in 2005.

Among the price increases last month, airline fares jumped 2.6 percent, prescription drug prices were up 0.4 percent and hospital costs rose 0.6 percent.

Pay checks did not keep up with inflation. Weekly earnings, after adjusting for inflation, fell by 0.7 percent in May, the third decline this year and the biggest since a 0.9 percent drop last September.

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On the Net:

Consumer prices: http://www.bls.gov/cpi

AP-ES-06-14-06 1807EDT