The U.S. and global economies are forecast to expand more slowly this year, in part because of rising interest rates. That, in turn, means slower growth in demand for oil. If prices are not disrupted by unforeseen events -- a big wild card, to be sure -- oil prices should settle in the low $40s per barrel this year, several economists forecast.
That should cool inflation significantly. Consumer energy prices rose 16.6 percent last year, the biggest increase since an 18.1 percent jump in 1990 -- the year oil prices shot up after Iraq's invasion of Kuwait. The jump in energy prices last year accounted for more than a third of the overall rise in the overall CPI.
With lower oil prices, the CPI is forecast to rise by around 2 percent this year, by many estimates.
Because food and energy prices can swing so widely over time, economists often exclude them to get a better sense of the underlying inflation. This so-called core inflation rate was much more tame last year.
The core-CPI rose 2.2 percent in the 12 months that ended in December. That's around the level of comfort for many Federal Reserve policymakers, who believe the CPI overstates inflation.
Indeed the core rate last year was up from 1.1 percent in 2003, a level uncomfortably low for several Fed officials who worried that year about the possibility of deflation -- a potentially damaging fall in the overall price level.
The Fed cut its benchmark interest rate to a four-decade low of 1 percent in mid-2003 in large part to push inflation higher, out of that danger zone. With the economy growing at a solid pace and inflation rising last year, Fed officials started raising the rate in June, gradually lifting it to 2.25 percent in December.
Today's inflation report reinforced the belief of many Fed officials that inflation remains under control. That means they can continue to raise their benchmark rate gradually this year, to make sure inflation stays contained.
Economists generally forecast the Fed to lift the rate to somewhere between 3 and 4 percent by year-end, depending on how the economy expands and how inflation behaves.
However other economists predict inflation will rise this year as interest rates rise. Low rates helped hold down the costs of rental housing and car prices, which should now start creeping up along with interest rates, according to some.
Others predict, or hope, that the improving labor market will eventually lead to stronger wage growth.
"While inflation clearly does not pose any serious problem at the moment, it does appear to be on an upward path," wrote Dean Baker, co-director of the Center for Economic and Policy Research.
