The Bureau of Labor Statistics announced yesterday that consumer prices, measured by the Consumer Price Index, actually fell in December.  Inflation for the entire year, however, clocked in at a pace that we haven't seen for many years. From The New York Times:

The Consumer Price Index, the best-known measure of inflation in America, rose 3.3 percent last year, the largest increase since 2000, the government reported yesterday.

The higher inflation rate was a result of a surge in oil prices early last year. Oil prices have since leveled off, allowing the inflation rate to return to more modest levels.

The moderating trend was already evident in December, when the index fell by 0.1 of a percent, the first month-to-month decline since July. That was mostly because of a sharp drop in gasoline prices; gas prices fell again in early January.

Policymakers, of course, tend to focus more on the trend in price-level growth than transitory ups and downs created by the likes of accelerations or decelerations in energy prices. Measures of "core" inflation, that we use to help us see through those temporary influences, were not out of line with the best guess of the CPI inflation trend. 

Whatever the future holds, inflation today remains decidedly modest. The so-called core inflation rate, covering all prices except those for energy and food, rose 2.2 percent last year, roughly the rate that has prevailed each year since 1997 with the exception of 2003, when the core rate was 1.1 percent. The December increase conformed to this pattern; the core rose only 0.1 percent.

The "median CPI", a measure of core inflation calculated by the Cleveland Fed, ticked up just a little in December, but was also generally consistent with the picture of a stable trend in consumer prices.  The summary table from the Cleveland report:

                                                                   

Percent Change                   From Previous Month
July August Sept. Oct. Nov. Dec.
CPI –0.1 0.1 0.2 0.6 0.2 -0.1
CPI less food & energy 0.1 0.1 0.3 0.2 0.2 0.2
MEDIAN CPI 0.1 0.2 0.1 0.2 0.1 0.2
Percent Change,                   Last 12 Months
July August Sept. Oct. Nov. Dec.
CPI 3.0 2.7 2.5 3.2 3.6 3.3
CPI less food & energy 1.8 1.7 2.0 2.0 2.2 2.2
MEDIAN CPI 2.4 2.5 2.4 2.4 2.3 2.4

Nonetheless, the consensus is clearly that the federal funds rate will continue its measured march northward.  From CNNMoney.com:

Even with the pace of inflation picking up last year, and some Fed members expressing concern, most analysts expect the Fed will keep raising interest rates in quarter-point increments rather than boosting them more aggressively. The central bank's policy-makers' next meeting is set for Feb. 1-2.

"I think what this does is ratify the Fed's current stance --- moving at a measured pace seems to be the prudent course," said Lehman Brothers economist Drew Matus.

"We're right where they want us to be -- between 2 and 2.5 percent increases in the core CPI. But last year there was more inflation than they were anticipating at the beginning of the year, and the concern you hear being expressed is that they don't want that to happen again," Matus said.