The core inflation (without energy & food) is momentary 1.8%. But it will climb soon because the labor market is tightening. Weekly jobless claims are on a historical low level, the job openings are on record high (stlouisfed), the unemployment rate dropped to 5.1% (economics) and wages started to climb (marketwatch). It is highly likely that the tightening labor market will drive wages and therefore labor costs upwards which should translate into higher prices for services and labor intensive goods. And we are already experiencing rapidly climbing rents and health care costs. Zero interest rates for too long could lead to an overheating labor market and push the core inflation rate higher.
The headline inflation rate (minus 0.1%) is momentary depressed because of the collapse of oil and other commodity prices. Today oil is around 60% cheaper than summer last year and gasoline prices at the pump dropped about 30%. But the diminishing price effect of dramatical reduced energy prices will disappear soon.
In the moment of writing international oil (Brent Crude) costs $48,50 that´s $2 more than the low from January ($46.59). So, since January oil didn´t get any cheaper! (trading) Next year the statistic will compare the oil price then with oil prices below or around $50. If commodity prices recover in 2006 then their advances would add onto the inflation rate. I don`t expect oil prices as high as in the recent years thanks to the technological progress which is reducing the exploration costs and rising supply. But zero interest rates for too long could encourage the oil speculation. According to Bloomberg the hedge funds are already betting on climbing energy prices (bloomberg). The oil price rally from late January through April, which drove the price for crude to $66 (plus 40%) is a warning.
If the Fed doesn´t hike interest rates soon then a heating labor market and climbing oil prices could drove inflation rate towards 3%. Then the Fed might respond with sharper interest rates hikes which could cause a recession. Better to fight inflation before it starts.
PS For illustration I choose one of Andy Warhol dollar signs from 1981.