updated 6/16/2008 8:20:42 AM ET 2008-06-16T12:20:42

Wall Street ended a turbulent week with a sharp gain Friday after government readings on inflation and a drop in oil prices eased worries about the effect of rising prices on consumers. The advance lifted the Dow Jones industrial average more than 165 points.

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Short-term Treasury prices rose after being pounded earlier this week on fears that the Federal Reserve would be forced to raise interest rates to combat inflation.

The readings arriving Friday and gains in the dollar supported a notion that the Fed will be able to walk a middle line as it seeks to balance the well-being of a fragile economy and pressures from rising prices. Recent drops in the dollar had contributed to higher oil prices because a weaker dollar makes each barrel more expensive.

"The news today tells us that it's not getting worse," said Linda Duessel, equity market strategist at Federated Investors. She said that while investors aren't necessarily seeing improvement in areas like inflation, they appear relieved that prices aren't running out of control and forcing the Fed to hike rates and risk sending the economy into a downturn.

"I think market watchers are hoping and expecting that we don't need another rate cut," she said.

The government's report that prices are rising came as no surprise to investors or consumer alike. The Labor Department's Consumer Price Index grew 0.6 percent last month, which was just above the 0.5 percent economists had expected. The core inflation reading, which excludes often volatile food and energy prices, edged up a more moderate 0.2 percent, as expected.

While overall prices showed their biggest one-month gain since November, the fact that the run-up seems largely contained to food and energy appeared to give investors some solace. Price spikes in all areas could make it harder for some consumers to reach into their wallets for anything more than the basics. And a pullback in consumer spending, which accounts for more than two-thirds of U.S. economic activity, could derail investors' hopes of seeing an economic recovery later in the year.

Still, the rise in energy costs is leaving some consumers in a downcast mood. The Reuters/University of Michigan preliminary reading on consumer sentiment for June fell to a near 30-year-low of 56.7 from 59.8 last month.

But the easing of some inflation concerns Friday appeared to bolster the case for the Fed to keep rates unchanged when it meets June 24-25 and to perhaps hold off on boosting rates for several meetings. But comments this week from Fed officials make clear that policymakers are mindful of rising prices and the taxing effect they can have on the economy.

The Dow rose 165.77, or 1.37 percent, to 12,307.35. Stocks rose moderately Thursday following a steep sell-off Wednesday.

Broader stock indicators also rose Friday. The Standard & Poor's 500 index advanced 20.16, or 1.50 percent, to 1,360.03, and the Nasdaq composite index rose 50.15, or 2.09 percent, to 2,454.50.

For the week, the Dow logged a 0.80 percent gain, the S&P 500 slipped 0.05 percent and the Nasdaq composite index fell 0.81 percent.

The inflation findings appeared to lend some calm to the bond markets. Bond investors fear inflation because it lowers the value of fixed-income securities, so short-term Treasurys, the most vulnerable to the effects of rising prices, moved higher.

The 2-year yield, which moves opposite its price, fell to 3.04 percent from 3.05 percent late Thursday. The yield on the benchmark 10-year Treasury note, however, rose to 4.26 percent from 4.22 percent. The yield on the 30-year long bond rose to 4.79 percent from 4.76 percent.

The dollar rose against other major currencies, while gold prices fell.

Oil prices fell, following a sharp rebound in the previous session. A barrel of light, sweet crude declined $1.88 to settle at $134.86 on the New York Mercantile Exchange.

Michael Strauss, Chief economist at Commonfund, said the advances seen Thursday and Friday belie some of the unease among investors that inflation, while somewhat in check now, could pop in the coming months.

"Behind the scenes of the euphoria ... they're still very nervous about financial market conditions and there still very nervous about economic conditions," he said.

Strauss expects Wall Street's volatility will continue.

He said investors will looking to a reading due Tuesday on inflation at the wholesale level for indications how long businesses might be able to refrain from passing some rising costs to consumers.

"We're still going to trade with the inverse jitters of the energy market," he said, predicting that stocks will still likely take a hit if oil prices rise.

In corporate news, Anheuser-Busch Cos. is holding preliminary talks with rival Grupo Modelo SAB, according to a report in The Wall Street Journal. The maker of Budweiser, Bud Light and other brands has received an unsolicited $46 billion bid from Belgian brewer InBev SA. Anheuser-Busch fell 28 cents to $61.12.

Lehman Brothers Holdings Inc. rose $3.11, or 13.7 percent, to $25.81 following reports that Chief Executive Richard Fuld is looking for outside capital, possibly from a sovereign wealth fund or a U.S. investor. The investment bank's shares have fallen about 30 percent this week after reporting a nearly $3 billion second-quarter loss. The company also ousted its chief financial officer and chief operating officer on Thursday.

Yahoo Inc. is now turning to rival Google Inc. to help squelch a rebellion among its shareholders who believe it should have accepted Microsoft Corp.'s $47.5 billion buyout offer while it was still available last month. Late Thursday, Yahoo announced talks with Microsoft had ended with no deal.

Yahoo fell 5 cents to $23.47, Google rose $18.56, or 3.4 percent, to $571.51 and Microsoft rose 83 cents, or 3 percent, to $29.07.

Overseas, Japan's Nikkei 225 average closed 0.61 percent higher. Britain's FTSE 100 index closed up 0.21 percent, Germany's DAX 30 index rose 0.76 percent, and the French CAC-40 index advanced 0.21 percent.

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