The rise in the core rate last year was up from a 1.1 percent increase 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.
The inflation report yesterday 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.
The Fed is likely to raise the rate to 2.5 percent at its next policymaking meeting, early next month, analysts widely agree.
Those expectations were bolstered yesterday by the Fed's most recent survey of regional economic conditions. The nation's economy continued to grow from late November through early January, but most of the Fed's 12 districts reported "steady or only slightly higher overall price levels," according to the so-called Beige Book.
Forecasters generally expect the Fed to lift its benchmark interest rate to somewhere between 3 and 4 percent by year-end, depending on how the economy expands and how inflation behaves.
However, some 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 start creeping up along with interest rates, some analysts say.
Others expect 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.
A number of Fed officials expressed concern about inflation risks at their last meeting, in December, citing high oil prices, a falling dollar, strong economic growth and rising labor costs.
But others countered that the dollar's fall will probably have a limited effect on consumer prices, that wage growth has been subdued and that businesses with big profits can absorb rising costs without passing them along to customers.
Despite the risks, Fed officials "generally expected that inflation would remain low in the foreseeable future," the minutes showed.
