After a sharp jump in April, consumer prices were unchanged last month, allaying fears among investors and government policymakers alike that the nation's inflation outlook had taken a big turn for the worse.

The Labor Department reported yesterday that prices of the goods and services that contributed most to the 0.7 percent increase in the April consumer price index -- gasoline, apparel, lodging away from home, tobacco products and airline fares -- all declined last month.

The report produced sighs of relief on Wall Street as both stock and bond markets rallied, partly on the grounds that the good inflation news makes it less certain that Federal Reserve policymakers will raise short-term interest rates at the end of this month. Fed Chairman Alan Greenspan is scheduled to testify this morning before Congress's Joint Economic Committee on the economic outlook and monetary policy and is expected to signal whether he feels a rate increase is needed to keep the economy from overheating.

The Dow Jones industrial average rose 189.96 points, or 1.79 percent, to close at 10,784.95. The Nasdaq index, which is heavily weighted with high-tech and Internet company stocks, soared 103.16, or 4.3 percent, to 2517.83. Fear that interest rates were about to go up had recently pummeled Internet stocks, which carry high price-to-earnings ratios and could face steep sell-offs if bonds become more attractive.

At the same time, yields on 30-year U.S. Treasury bonds fell to 6.06 percent from 6.11 percent as the price, which goes up when yields go down, rose $6.25 per $1,000 face amount.

Greenspan and several other Fed officials have expressed concern that inflation eventually will worsen if U.S. economic growth -- led by particularly strong consumer spending -- doesn't slow down to what they regard as a more sustainable pace. For the past three years, the economy has grown at about a 4 percent rate, while the officials willing to pick a number have said that growth of 3 percent or less is all that can be sustained without rising inflation on a long-term basis.

Several forecasters said the economy likely is expanding at about a 4 percent pace in the current quarter, about the same as the 4.1 percent rate of the January-March period. However, the same forecasters generally expect somewhat slower growth in the second half of the year.

"The complete lack of inflation puts the Fed in a bind," said Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York. "Recent remarks by Fed officials make it seem that they are hell-bent on tightening.

"But there is not much of a rationale that comes out of recent [economic] data. Not only is inflation nonexistent, but job growth is clearly slowing," Steinberg said. Over the past three months, payroll employment rose an average of 146,000 a month, down from 260,000 for the six months ended in February.

Ken Mayland, chief economist at Key Corp., a large Cleveland-based regional banking firm, echoed Steinberg.

"The May CPI results bolster the case that what happened in April was a one-time occurrence, not a continuing phenomenon," Mayland said. "If the Fed ultimately decided to lift rates on June 30, it will be out of fears of future inflation problems -- on a `fast growth leads to price pressures' line of thinking -- not based on actual inflation results."

The concern at the Fed is not just that growth is fast but that unemployment is already so low -- 4.2 percent last month -- that continued rapid expansion will drive the jobless rate down to the point that wages start rising in an inflationary fashion.

J. Alfred Broaddus, president of the Richmond Federal Reserve Bank, warned in a recent speech, "Most postwar business expansions have ended because excessive growth in consumer and business demand, underwritten by expansionary monetary policy, has set off inflationary pressures," which eventually had to be countered by interest rate increases "that produced recessions."

"The risk of overheating is out there," Broaddus said.

That view was bolstered yesterday by the results of the Fed's latest nationwide survey of economic conditions conducted for use at the central bank's June 29-30 policymaking session.

"District reports indicate that the U.S. economy remains strong, with gains in activity widespread," the survey summary said. "Retail activity in most districts has shown little sign of slowing, and consumers remain upbeat about the economy. . . . Manufacturing activity continues to improve in most areas from the sluggish conditions of the past year and a half."

"Labor markets remain very tight in almost all districts, with increased reports of upward pressure on wages in many parts of the country. . . . Prices, however, with the exception of several construction materials, remain well behaved," the summary said.

The housing sector was red hot during the winter, with housing starts running at about a 1.75 million unit annual rate from December through March. Yesterday the Commerce Department reported that after a dip to a milder 1.58 million rate in April, starts rose again to a 1.68 million rate. However, the number of new building permits issued, which fell in both March and April, recovered only slightly last month.

A key factor taking some steam out of housing construction has been a sharp rise in mortgage interest rates. Rates on 30-year fixed-rate mortgages, which were well below 7 percent last fall, are now well above 7.5 percent, and a survey of home builders found they expect sales and construction to slow soon.

Investor concerns in recent weeks about inflation and the prospect of a Fed move to raise its 4.75 percent target for overnight interest rates have driven up longer-term interest rates that are determined by market forces. That increase has spilled over into mortgage rates.

Meanwhile, the Fed also said that the output of the nation's factories, mines and utilities rose a small 0.2 percent last month. Still, it was the fourth monthly increase in a row following an extended period last year when faltering export orders put manufacturing in the doldrums.

However, from an inflation point of view, there were few bottlenecks or shortages pushing up prices of industrial products. Despite overall strong economic growth, only 80.5 percent of the nation's total industrial production capacity was actually in use last month, the Fed report said.

CAPTION: Price Ease (This graphic was not available)