NEW YORK (CNNfn) - U.S. bond prices surged Wednesday morning after long-awaited consumer inflation data came in flat, calming fears that rising inflation will trigger deep interest rate hikes.
The May consumer price index (CPI), which gauges U.S. inflation on a retail level, came in unchanged, a sharp retreat from April's unexpectedly robust upturn of 0.7 percent. Investors had steeled themselves to see an increase of 0.2 percent, leaving the inflation-sensitive bond market in particular soaring in relief.
Shortly before 9 a.m. ET, the benchmark 30-year Treasury bond surged 22/32 of a point in price to 89. The yield, which moves in the opposite direction, fell to 6.05 percent.
Bond traders had nervously awaited the CPI ever since the alarming April release stirred concerns that long-dormant inflationary pressures may be stirring again. However, the May data indicate that the previous inflation spike was an isolated occurrence, not the start of a definitive trend.
"We think inflation is going to remain benign going forward," said Ethan Harris, Lehman Brothers senior economist.
The sign of subdued inflation encouraged economists to speculate that the Federal Reserve will not force U.S. interest rates dramatically higher, at least not as quickly as gloomy bond traders had expected.
Rate fears recede
The bond market has been bracing for multiple rate hikes for weeks, driving yields to 19-month highs to reflect investors' growing conviction that short-term lending rates are on the rise. Since the Fed's rate-setting Open Market Committee (FOMC) sent financial markets a signal by adopting a bias toward higher rates last month, the long bond yield soared nearly 30 basis points, or 0.30 of a percentage point.
Wednesday's CPI gave investors hope that the FOMC will only raise rates once, perhaps at its next meeting at the end of the month, before backing off again.
"The markets right now are looking for multiple tightenings, and would not be too upset with one rate hike," said Ethan Harris from Lehman Brothers.
However, at least one interest rate increase remains almost inevitable, even though the data showed that inflation remains subdued.
"I really think, in the end, it probably doesn't matter for the Fed," said Michelle Laughlin, Treasury market strategist at Prudential Securities. "They have made it clear that they want to be pre-emptive. They want to take action before signs of inflation are apparent so they can get ahead of the curve, and (that way) they have to do less in terms of raising interest rates instead of doing more."
Fed Chairman Alan Greenspan will provide further insight into the FOMC's current policy when he speaks Thursday on the U.S. economic outlook.
Dollar mixed after data
The dollar, meanwhile, continued on its early-morning course, soaring against the beleaguered euro but finding it more difficult to gain on the yen.
Dollar bulls were "disappointed" by the sign of low inflation. A sharp upturn in interest rates would promote the dollar against other monetary units by making it more expensive to deal in U.S. currency, effectively making the dollar buy more.
In Europe, where investors are still betting on lower rates in the near future, the euro tumbled more than a full cent in value to $1.0319.
Against the yen, the dollar was flat at 120.50 yen. Traders said speculators hadn't expected the Bank of Japan (BOJ) to leave Japanese rates at effectively zero, leaving dollar/yen activity lackluster. 
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