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— both approached 2% by late in the year (year-over-year basis), about double the pace of late 2003.

The firming of core inflation in 2004 reflected somewhat higher unit labor costs, rising import prices (partly reflecting a falling dollar) and upward pressures on commodity prices. Core inflation is likely to firm up a bit more in 2005, even as overall inflation recedes along with energy prices, although a serious inflation breakout is not in the cards. This kind of performance, along with evidence of anti-inflation resolve at the Fed, should control inflation expectations in financial markets.

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