(Reuters) - A relatively benign U.S. reading on consumer price increases triggered a sharp relief rally in stocks and bonds on Wednesday, but traders and investors warn that markets are likely to remain anxious about the pace of inflation.

The path ahead remains shadowed by ongoing uncertainty about the outlook for further Federal Reserve interest rate cuts and incoming president Donald Trump's actions on issues like taxes and tariffs, market participants said.

"The issues that have been driving rates higher and weighing on stocks are still out there," said Art Hogan, market strategist at B. Riley Wealth. "We just don't know whether we'll see tariffs that are surgical or sweeping, what kind of policy moves we'll see in other areas that could feed into inflation or growth."

While the consumer price index for December rose at a faster-than-expected pace, markets seized on the core CPI, which excludes the volatile food and energy components. Core CPI increased 0.2% in December after rising 0.3% for four straight months.

Stocks surged following the CPI report with the benchmark S&P 500 jumping 1.8%.

The benchmark 10-year Treasury reversed losses incurred in the wake of last Friday's strong job creation report, pushing yields back down to 4.66%. Yields fall when bond prices rise.

"This reading beat expectations modestly, but traders pounce aggressively on any whiff of good news," said Steve Sosnick, market strategist at Interactive Brokers. "It's a number and a reaction that we have to view positively, although quite possibly it's magnified by the negativity we've been battling."

Yields had climbed sharply in recent weeks after the Fed in December tempered its outlook for rate cuts and projected firmer inflation in 2025 than it had previously.

Before the CPI report, "there was some whispering that we might actually see a rate hike," said Jeff Weniger, head of equity strategy at WisdomTree Inc., a New York asset management firm.

But fears about the potential fallout that Trump's policies could have on inflation remain a concern. Fed officials on Wednesday noted heightened uncertainty in the coming months as they await a first glimpse of the incoming administration's policies, even as they said Wednesday's data showed inflation was continuing to ease.

Following the CPI report, Rick Rieder, BlackRock's chief investment officer of global fixed income, said progress on inflation "may be slow and uneven, not least due to the great uncertainties that face the economy with fiscal policy changes coming over the next year."

For example, Rieder said in emailed comments, changes to the tariffs and trade regime "do hold the potential to increase core goods inflation for a time."

As the market remains data dependent, volatility could become more common. Kevin Flanagan, head of fixed income strategy at WisdomTree, expects that moves of 10 to 15 basis points daily for the 10-year Treasury could become the new norm.

Following the data, traders of interest-rate futures still projected the Fed waiting until June to deliver its next rate cut. But now they are pricing about even odds the central bank will follow with a second rate cut by year's end. Before the report, markets reflected bets on only a single cut in 2025.

Tina Adatia, head of fixed income client portfolio management for Goldman Sachs Asset Management, said in a note to clients that the CPI data strengthens arguments for further cuts but "the Fed has scope to be patient."

"More good inflation data will be required for the Fed to deliver further easing," Adatia said.