NEW YORK (CNNMoney.com) - Higher energy prices lifted the government's broad inflation reading in January, as the closely watched report released Wednesday showed more upward pressure on prices than expected by Wall Street.

But economists and markets seemed to react with relief that the report showed most of the inflation still restricted to the food and energy sectors. Stocks opened higher and bond prices rose following the report.

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The Consumer Price Index, the government's key measure of retail prices, increased 0.7 percent after a decline of 0.1 percent in December. Economists surveyed by Briefing.com had forecast a 0.5 percent rise in January.

It was the biggest rise in overall prices since a 1.2 percent jump in September, led by a spike in gasoline prices following Hurricane Katrina.

But the so called "core CPI," which excludes often-volatile food and energy prices, rose only 0.2 percent, compared with a revised 0.1 percent rise in December. Economists had forecast the closely watched core CPI to post a 0.2 percent rise, the same gain originally reported for December.

Inflationary pressure has gotten more attention from investors in recent weeks amid signs that the Federal Reserve will continue to raise interest rates, even after its March 27-28 meeting, when a quarter-percentage point hike is widely expected. The Fed has raised the Fed funds rate 14 straight times by a quarter-percentage point each time to 4.5 percent.

On Tuesday, the minutes of the Jan. 31 meeting showed that some central bank policy makers were concerned that readings on core inflation and inflation expectations were "somewhat" higher than desired, feeding fears about the how the market would react if core CPI came in even a touch over forecasts.

"I think there were some significant fears that the CPI could come in above 0.2 percent," said Anthony Chan, senior economist at JPMorgan Private Client Services. "Given what we read in the Federal Reserve minutes, there was no room for error on core in the eyes of the market."

Over the last 12 months, core CPI was up 2.1 percent, down from the 2.2 percent 12-month gain seen through December. Chan and other economists said that gain is close to the rise in the core of 2 percent or less preferred by the Fed.

"If it remains this close to 2 percent, then I think economically speaking, we're sitting pretty," said Jason Schenker, economist with Wachovia. "I don't think this changes what the Fed does in May. I think another rate hike is likely then. But I think it stems the talk of rates rising as high as 5.25 percent, at least for now."

The January report follows two months that saw lower energy prices overall. But energy prices increased 5 percent in the most recent month compared to December, led by a 6.4 percent rise in gasoline prices.

The overall energy prices were partly contained by the warmest January on record, which helped keep prices of heating fuels in check. Home heating oil was down 1.9 percent in January.

Food prices also posted a 0.5 percent rise, the biggest jump in food prices since a 0.7 percent rise last April.

Over the last 12 months, the overall CPI was up 4 percent, more than the gain in average wages during the same period, which means that the average hourly worker saw their paycheck lose ground to prices during the last year.

Wages rose 3.3 to 3.9 percent during the last 12 months, depending on how they're measured.

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