A sharp rise in energy costs pushed U.S. consumer prices up last month at the fastest pace in nearly a year, but underlying price pressures remained muted, a government report showed on Friday.

The consumer price index (search), the most widely used gauge of U.S. inflation, climbed 0.5 percent in January after a 0.2 percent rise the month before, the Labor Department (search) said.

The so-called core CPI, which strips out volatile food and energy prices, gained just 0.2 percent.

Wall Street economists had expected the overall CPI to rise 0.3 percent and the core index to tick up a slim 0.1 percent.

The mild increase in core inflation, while larger than expected, held the 12-month change steady at the 38-year low of 1.1 percent. Federal Reserve officials see such a low rate of change as tantamount to price stability.

Fed Governor Ben Bernanke told reporters the report was "consistent with continuing low inflation."

"Energy prices are highly volatile and they tend to reverse over a period of time," he said. Still, he warned that if energy costs kept marching upward it could slow growth.

U.S. Treasury bond prices dipped slightly and the dollar moved up a bit on the higher-than-expected readings — moves exacerbated later by a terror alert in Japan and an upbeat comment on jobs creation from Fed Chairman Alan Greenspan (search).

Stocks fell, with the blue chip Dow Jones industrial average closing off 45 points at 10,619.

Economists said that at most the report showed inflation stabilizing after a period of slowing. They said the Fed could bide its time before pushing overnight interest rates up from their 1958 low of 1 percent.

"This is not worrisome from the Fed's standpoint, but an acceptable ... pace of inflation that will allow policy-makers to raise rates if and when employment growth picks up to a vigorous clip," said Steve Stanley, an economist with RBS Greenwich Capital in Greenwich, Connecticut.

Much of the increase in overall consumer prices was due to a big jump in energy costs, which were up 4.7 percent last month — the biggest increase since March.

Gasoline prices rose 8.1 percent, the most since last February, while fuel oil costs spiked 7.2 percent and natural gas prices increased 3.8 percent.

The energy price rise fed through to a sharp 1.7 percent increase in transportation costs, even though new car prices fell. And the higher price of heating a home helped push housing costs up 0.4 percent, the sharpest gain since March.

While most economists emphasized the still-slow rate of core inflation, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said the quickened pace of overall inflation likely reflected a weaker dollar and could prove durable.

"While economists typically view food and energy price increases as fluctuating randomly around the core rate of inflation, it would be wrong to view the recent trend in this context," he said.

Citing prolonged higher energy prices, St. Louis Federal Reserve Bank President William Poole told reporters core inflation might be too narrow a gauge of price pressures.

Poole said chances of an inflation surprise to the upside outweighed the risk of a big move to the downside. However, he said the most likely outcome for 2004 was for the underlying pace of inflation to stay near its current low level.

Last year, Fed officials were worrying about inflation moving too low. But now that the economy is showing some muscle, they see risks better balanced.

Still, officials at the central bank think inflation is unlikely to prove troublesome any time soon and have vowed to act patiently as they consider when to push interest rates up.

"With inflation very low and substantial slack in the economy, the Federal Reserve can be patient in removing its current policy accommodation," Greenspan said last week.

Financial markets have been betting on a rate rise in August or September, while many economists expect the Fed to stay on hold into next year.