By Caroline Baum Nov. 13 (Bloomberg) -- When the Federal Reserve talks about the risks to the economy, be it slower growth or higher inflation, it's usually an either/or proposition.

What if it's both? What if the U.S. economy is facing the prospect of slower growth and higher inflation, a dual diagnosis requiring offsetting actions for each symptom?

Certainly that's where the risks lie, as Fed Chairman Ben Bernanke pointed out in congressional testimony last week.

``The Committee recognized that risks remained to both of its statutory objectives of maximum employment and price stability,'' Bernanke said, explaining policy makers' outlook at the conclusion of the Oct. 30-31 meeting.

Bernanke enumerated the ``downside risks'' to the Fed's already slow-growth forecast: a deterioration in financial market conditions; a further tightening of credit standards; a steep decline in home prices that depresses consumers' willingness to spend; and a deceleration in business investment in response to a dimming economic outlook....

For the first time in 18 months, the U.S. government bond market is showing growing anxiety that the plummeting dollar will result in runaway inflation.

The combination of the currency's 31 percent decline during George W. Bush's presidency, oil prices near a record high and interest rates at a four-year low have convinced investors that consumer prices are poised to accelerate. While all Treasuries have gained during the worst U.S. housing market since 1991, none have done better than Treasury Inflation Protected Securities.....

...the housing GSEs are among the largest borrowers
in the world. A comparison I like to make is when you add Fannie’s and Freddie’s
outstanding debt of almost $800 billion each, with the FHLBanks’ debt outstanding of
$900 billion, and Fannie’s and Freddie’s net guaranteed MBS of $2.9 trillion, it comes to
$5.4 trillion. That is bigger than the $4.9 trillion publicly held debt of the U.S.

Like other financial institutions, the housing GSEs face a full range of risks, including
market risk, credit risk, and operational risk -- only on a much larger and more
concentrated scale than other financial institutions. Fannie Mae, Freddie Mac and some
of the FHLBanks have each experienced serious difficulties handling those risks over the
years. Current remediation efforts will help reduce operational risks, in particular, but all
three risks will continue into the future.

"There are 77 million baby boomers now ranging from age 41 to age 59," Kotlikoff writes. "All are hoping to collect tens of thousands of dollars in pension and healthcare benefits from the next generation. These claimants aren't going away. In three years, the oldest boomers will be eligible for early Social Security benefits. In six years, the boomer vanguard will start collecting Medicare. Our nation has done nothing to prepare for this onslaught of obligation. Instead, it has continued to focus on a completely meaningless fiscal metric – 'the' federal deficit – censored and studiously ignored long-term fiscal analyses that are scientifically coherent, and dramatically expanded the benefit levels being explicitly or implicitly promised to the baby boomers."

By James G. Neuger and Simon Kennedy Nov. 14 (Bloomberg) -- ``It may be our currency, but it's your problem'' was Treasury Secretary John Connally's taunt when the U.S. unhooked the dollar from the gold standard in 1971, unilaterally rewriting the rules of world business in America's favor.

Now the world is taunting back. Almost four decades after the U.S. tore up the monetary arrangements that governed the post-World War II international economy, the dollar's fall from grace amounts to a tectonic shift in the global hierarchy. This time, the U.S. currency is on the losing side.

After declining in five of the last six years, the weakest dollar in the era of floating currencies reflects a period of diminished U.S. political and economic hegemony. Whoever wins the White House next year will confront two unpopular choices: Accept the fall in U.S. clout and the rise of new rivals, or rein in record public and consumer debt that the rest of the world no longer wants to bankroll.....

IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort. Our latest assessment (see article) suggests that the United States may well be heading for recession.

Granted, GDP grew by a robust 3.9%, at an annual rate, in the third quarter. Granted also, revisions may well push this figure up. But that was the past. More timely signs suggest that the economy could stall in this quarter. By early next year, output and jobs could be shrinking. The main cause is the imploding housing market. Experts said that house prices could never fall nationwide. But fall they have, by 5% in the past 12 months. Residential investment has collapsed, but a glut of unsold homes means that prices have much further to drop. Americans' spending is likely to be dented much more by a fall in house prices than it was in 2001 by the stockmarket's collapse. With house prices lower and credit conditions tighter as a result of the subprime crisis, households can no longer borrow against capital gains to support their spending.....

When central bankers in the Middle East say they have no plans to end their fixed exchange rates to the dollar, the currency market hears the opposite.

Merrill Lynch & Co. predicts either the United Arab Emirates or Qatar will cut their dollar peg within half a year. Standard Chartered Plc says the six Gulf Cooperation Council nations need to raise the value of their currencies 20 percent. The difference between the price of the Saudi Arabian riyal and the cost of buying it in a year using forward contracts has widened 10-fold since October as traders bet the kingdom will sever its 21-year-old link to the dollar, according to data compiled by Bloomberg.

``The dollar peg is doomed,'' said Jim Rogers, chairman of New York-based Rogers Holdings and a former partner of hedge fund manager George Soros.

The gulf countries, which supply 22.2 percent of the world's oil, according to BP Plc, are under pressure to abandon their fixed exchange rates after the dollar tumbled 10 percent against the euro in 2007. OPEC members Venezuela and Iran want to price more crude in other currencies. Inflation in the region is accelerating at the fastest pace in at least five years because central banks follow U.S. Federal Reserve policy.....

Stagflation Danger

The last time the economy suffered through slowing growth and rising inflation, or stagflation, was in the 1970s. The 10- year note's yield rose to 10.3 percent by 1980 from 5.89 percent at the end of 1971.

``I think we have some version'' of stagflation now, said Paul McCulley, a money manager at Newport Beach, California- based Pacific Investment Management Co., which runs the world's biggest bond fund. ``We're importing a degree of inflation with the weaker dollar and oil prices, which the Fed can't do anything about. The economy is weaker.''

The Fed probably will reduce its interest rate target for overnight loans between banks to less than 3 percent from 4.5 percent now, choking off the rally, McCulley said.....

Dec. 3 (Bloomberg) -- For only the fourth time since Gerald
Ford's presidency, oil is threatening to push the rate of
inflation above 10-year Treasury yields. For bond investors
basking in the biggest bull market since 2002, that's bad news.
Yields on 10-year notes fell as low as 3.79 percent last
week, within a third of a percentage point of the consumer price
index. Every time inflation has exceeded what investors get paid
to own Treasuries, bonds have plunged. That happened from August
1973 through August 1975, when Ford addressed the nation with
his ``Whip Inflation Now'' speech, and from January 1979 to
October 1980, the end of Jimmy Carter's term.
``It's like the 70s,'' said Jim Rogers, a former partner of
hedge fund manager George Soros who predicted the start of a
commodities rally in 1999. Rogers said in an interview in
Singapore that the rise in oil reminds him of when climbing fuel
costs almost three decades ago caused 10-year yields to soar.
``We're in a period of a commodity bull market and
inflation,'' Rogers said. ``I would not buy government long-term
bonds. We'll be going down for years to come. Commodities are
telling you to sell Treasuries. Inflation is everywhere.'' He
holds positions that will benefit if Treasuries fall.
The only other time inflation outpaced yields was in
October 2005, when oil climbed 8 percent in a week in the
aftermath of Hurricane Katrina. Treasuries fell the next two
months.

Worsening Inflation

During the 1970s the 10-year note's yield, which moves
inversely to its prices, rose to 12.4 percent by 1981 from 5.89
percent at the end of 1971. Normally, yields average 3.8
percentage points more than inflation, based on trading since
1987. Even if the relationship just reverts back to the 2.2-
percentage-point average in the first half of the year,
investors in 10-year notes would lose 0.8 percent.
``The inflation story going forward is going to be very
different than what we've seen in the past,'' said E. Craig
Coats Jr., co-head of fixed income at Keefe, Bruyette & Woods
Inc. in New York, who began trading bonds in 1969 at Salomon
Brothers. ``The inflation news is going to be worse.''
The yield on the benchmark 4 1/4 percent note maturing in
November 2017 dropped 6 basis points last week at 3.94 percent,
according to New York-based bond broker Cantor Fitzgerald LP.
The price of the security rose 15/32, or $4.69 per $1,000 face
amount, to 102 16/32.

`Unsustainable'

Investors have sought Treasuries as a haven from widespread
losses in mortgage markets even as consumer prices climbed 3.5
percent through October, the most since August 2006. U.S.
government debt has returned 9 percent this year, including
reinvested interest and price gains, the most since gaining 11.5
percent in 2002, according to Merrill Lynch & Co. data.
The combination has left the Federal Reserve with the
dilemma of either cutting interest rates next week for a third
time since September to prevent the housing slump from pushing
the economy into recession or keeping rates steady to fight
inflation.
``You've got to be thinking inflation is falling by a
dramatic amount'' to buy bonds at their current yields, said
Thomas Atteberry, who manages $2.3 billion in fixed income
assets at First Pacific Advisors LLC in Los Angeles. ``I'm a
little hard pressed to see that with the price for oil and the
prices we're seeing for food. It's unsustainable.''
Oil reached $99.29 a barrel on Nov. 21 and is up 53 percent
for the year, and gold climbed to $845.84, within $5 of its all-
time high of $850 an ounce set in 1980.

`Renewed Turbulence'

The central bank highlighted inflation concerns when it
lowered its target for overnight loans between banks by a
quarter point to 4.5 percent on Oct. 31. ``Readings on core
inflation have improved modestly this year, but recent increases
in energy and commodity prices, among other factors, may put
renewed upward pressure on inflation,'' the Fed said in its
statement.
In emphasizing so-called headline inflation risks, the Fed
is including the impact of rising food and energy prices, which
are more volatile than other items tracked in the index and
usually excluded from the central bank's projections.
Fed Chairman Ben S. Bernanke signaled ``renewed
turbulence'' in credit markets may have shifted risks between
growth and inflation during a speech in Charlotte, North
Carolina, on Nov. 29, adding to speculation the central bank
will cut rates again. Financial futures traded on the Chicago
Board of Trade show that there is a 68 percent chance the Fed
lower rates at least a quarter of a percentage point on Dec. 11.
The average price of a barrel of oil was $6.87 in 1974, 77
percent higher than in 1973, according to the U.S. Energy
Information Administration. The average price of crude tripled
from January 1979 to January 1981 to $28.81, agency data shows.

China, India

Keefe, Bruyette's Coats said his forecast for faster
inflation is based on demand from China, India and other
emerging-market economies for oil and other commodities, demand
that wasn't there in the 1970s. Global growth presents investors
with ``a very different scenario'' than earlier periods, he
said.
In October 1974, one month after appointing Alan Greenspan
as his chief economic adviser, Ford urged the U.S. to conserve
energy and increase productivity to overcome acceleration in the
consumer price index, which reached 12.1 percent that month. The
10-year Treasury yield ended the month at 7.8 percent.
``I say to you with all sincerity that our inflation, our
public enemy number one, will, unless whipped, destroy our
country, our homes, our liberties, our property, and finally our
national pride, as surely as any well-armed wartime enemy,''
Ford said.
Ford also drew attention to a button on his lapel with the
letters WIN for whip inflation now. ``It bears the single word
WIN,'' he said. ``I think that tells it all.''

Misery Index

The Misery Index, created by the economist Arthur Okun, an
adviser to President Lyndon Johnson, is the sum of the
unemployment and inflation rates. The index peaked in June 1980
during the Carter administration, when the jobless rate reached
7.6 percent and consumer prices rose 14.4 percent.
Both instances of negative real yields in the 1970s were
caused by the central bank's unwillingness to tackle rising
prices by raising rates, said Lyle Gramley, a Carter economic
adviser from 1977 until he was appointed a Fed governor in 1980.
Carter's appointment of Paul Volcker to head the Fed in
1979 was an acknowledgment of the severity of the economy's
problems, Gramley said in an interview. ``There wasn't any
alternative other than very tough monetary policy.''
Volcker ended up boosting the central bank's target rate to
20 percent in 1980. Should real yields swing into negative
territory it will be a ``unique'' consequence of the flight to
quality, Gramley said.

By Rich Miller
Dec. 17 (Bloomberg) -- The world economy is facing the risk
of both recession and faster inflation.
Global growth this quarter and next may be the slowest in
four years, while inflation might be the fastest in a decade,
say economists at JPMorgan Chase & Co.
The worst U.S. housing slump in 16 years, coupled with a
tightening of credit by banks, has brought the world's largest
economy ``close to stall speed,'' according to former Federal
Reserve Chairman Alan Greenspan. At the same time, rapid growth
in China and other emerging markets is driving energy and food
prices higher worldwide.
``What lies ahead is a period of stagflation -- slow or no
growth combined with rising inflation -- in the advanced
economies,'' says Joachim Fels, co-chief global economist at
Morgan Stanley in London.
Harvard University economist Martin Feldstein is among
those who say it would be just a mild case of what the world
endured in the 1970s and early 1980s, when a 10-fold increase in
oil prices drove both unemployment and inflation above 10
percent. Still, it poses a dilemma for the Fed and other central
banks as they struggle to decide which problem they should
tackle first.
How they respond will go a long way in determining which
danger proves to be the biggest: a slumping global economy or
rising prices worldwide.
For now, traders in futures markets are betting the Fed
will remain focused on supporting growth, even after the latest
government inflation reading last week showed consumer prices
rose in November at the fastest pace in more than two years.

Another Cut

As of Dec. 14, investors put a 74 percent probability on
another quarter percentage-point cut in the Fed's benchmark
overnight rate in January, down from 100 percent the day before.
``Central banks don't have as much flexibility as they'd
like, with inflation rising and demand slowing,'' says David
Hensley, director of global economic coordination at JP Morgan
Chase in New York. His team sees global growth of 2.4 percent
this quarter and next and inflation at 3.5 percent.
That's a far cry from the bad old days more than a
generation ago, when world growth slowed to just 0.7 percent in
1982 while inflation ran at an annual rate of 13.7 percent,
according to data compiled by the International Monetary Fund.
``The numbers now are very different than what they were
then,'' Feldstein said in a Dec. 14 interview. ``We are not back
to the very high inflation rates we had in the late 1970s and
early 1980s, fortunately.''

Highest Rate

Even so, no less an authority than Greenspan himself
expresses concern. Speaking on ABC's ``This Week'' program aired
yesterday, the former Fed chairman said a period of ``remarkable
disinflation'' is ending. ``We are beginning to get not
stagflation, but the early symptoms of it,'' he said.
``This is a much tougher monetary-policy environment than
anything I experienced,'' Greenspan told the Wall Street Journal
on Dec. 14. Through the first 11 months of this year, consumer
prices rose at an annual rate of 4.2 percent. That's up from 2.5
percent for all of 2006 and, if maintained in December, would be
the highest rate in 17 years.
``The numbers are scary,'' says Stephen Cecchetti, former
director of research at the New York Fed, who's now professor of
international economics at Brandeis University's International
Business School in Waltham, Massachusetts.
It isn't just a U.S. concern. Inflation in Europe last
month rose at its fastest annual pace since May 2001, increasing
by 3.1 percent as food costs soared.
``The oil-price boom and rising food prices have clearly
accelerated inflation developments since summer,'' Austrian
central bank Governor Klaus Liebscher said in Vienna on Dec. 14.

Inflation in China

Surging food prices are also pushing up inflation in China.
Consumer prices in the world's fastest growing major economy
rose at a year-over-year rate of 6.9 percent in November, the
quickest in 11 years.
Behind the burst of inflation: rapid growth in emerging
markets that is lifting prices worldwide for everything from oil
to gemstones.
Uncut diamonds will get more expensive with ``increasing
demand from fast-growing economies such as India and China,''
Gareth Penny, managing director of De Beers, the world's biggest
diamond company, said on a Nov. 22 conference call from the
company's headquarters in Johannesburg.
That's filtering down to consumers. London-based Signet
Group Plc, the world's largest jewelry-store owner with shops
throughout the U.S. and U.K., plans to increase U.S. prices
after Feb. 14, Valentine's Day, to cover increasing costs of
diamonds, gold and platinum, Chief Executive Officer Terry
Burman said on a Nov. 27 conference call.

Limited Success

China and other emerging markets are trying to slow their
economies to keep inflation in check by tightening monetary
policy. They've had limited success, in part because some of
them have tied their currencies -- directly or indirectly -- to
the dollar or the euro.
That restricts their ability to raise interest rates to
slow growth because it would probably also lead to an unwanted
appreciation of their currencies.
``Global inflation pressures emanate mainly in the emerging
countries, where growth is strong and monetary policy is
relatively expansionary,'' Fels of Morgan Stanley says.
The same emerging-market nations have also helped stoke
inflation by sheltering their consumers and companies from
rising oil prices through subsidies. That's kept energy demand
in China, India and other countries high because domestic prices
are still low.

Pressure to Cut

If the global economy faced only the risk of faster
inflation, the policy prescription would be clear: higher
interest rates. Yet with growth slowing in the U.S. and Europe,
central banks remain under pressure to cut.
The Fed has already reduced its benchmark rate by a full
percentage point in the last four months, while the European
Central Bank has held borrowing costs steady rather than
tightening credit as previously planned.
U.S. growth will slow to 1 percent in the fourth quarter as
consumer spending cools and the housing slump enters its third
year, according to a Bloomberg survey of economists from Dec. 3
to 10. The economy expanded 4.9 percent in the third quarter.
``I'm not going to put a happy face on the slowing U.S.
consumer,'' Jeffrey Immelt, chief executive officer of General
Electric Co., told analysts in New York on Dec. 11. ``Our
businesses that touch housing in the U.S. are going to be
challenged.'' Fairfield, Connecticut-based GE is the world's
third-biggest company by market value.

Pared Forecasts

In Germany, two institutes that advise the government
separately pared their growth forecasts for Europe's largest
economy on Dec. 13, as rising energy costs sap consumers'
spending power and the euro's appreciation hurts exports.
The Munich-based Ifo institute cut its growth prediction to
1.8 percent in 2008 from a June forecast of 2.5 percent. The
Kiel-based IfW institute reduced its outlook to 1.9 percent from
a September forecast of 2.4 percent. Germany's economy grew 2.9
percent in 2006.
Feldstein, who heads the national bureau that serves as the
arbiter of when U.S. recessions begin and end, says the
combination of a stalled economy and rising inflation could be
seen as a form of stagflation.
``It depends on how you want to define it,'' he says. ``If
you say an inflation rate of 3.5 percent and a recession is
stagflation, then we could have stagflation.''

In early 2001, economist Stephen Roach raised a warning flag that enraged many peers: The U.S. risks repeating Japan's mistakes of the 1990s.

It was during the darkest days of the Nasdaq crash that Roach, then Morgan Stanley's chief economist, began worrying Japan's malaise could be repeated in the No. 1 economy. The concern was less about the loss of wealth than policy makers papering over economic cracks with easy money.

Roach called it the ``bubble fix,'' a policy then-Federal Reserve Chairman Alan Greenspan is now at great pains to justify. Ben Bernanke hasn't deviated from that strategy since succeeding Greenspan in February 2006.

At its core is a Bank of Japan-like belief that low short- term rates and liquidity are the cure for sliding stocks, plunging real estate prices and lost investor confidence. As 2008 begins, U.S. policy makers need to look long and hard at whether they're repeating Japan's mistakes.....

There's inflation and there's deflation. Both are bad, especially in excess, though stagflation -- defined as no or slow economic growth combined with a rising inflation rate -- holds a special place in the darker recesses of the dismal science's pantheon, not the least because of the dilemma it poses for central banks.

``Cutting interest rates to prevent a recession could stoke inflation pressures further,'' says Joachim Fels, London-based co-chief global economist at Morgan Stanley. ``Conversely, raising rates or keeping them unchanged could push the economy over the brink.''

Central bankers aren't stupid. They understand the options facing them. Yet, like deer frozen in the headlights of an oncoming car, they seem unable or unwilling to wholeheartedly attack either the slow-growth problems facing the global economy or the inflation pressures. Instead, by adopting half measures, they act as if they are trying to wish the world's difficulties away and continue to let them fester. By so doing, they increase the probability of eventually being overwhelmed by stagflation.....

Nouriel Roubini isn't known for subtlety. His pronouncements about the global economy have an uncanny knack for raising eyebrows and making headlines.

Such is the case with the chairman of Roubini Global Economics LLC's recent talk of ``stagdeflation.''

It's an intriguing -- many will say overly pessimistic -- take on the already raging debate about stagflation risks facing the U.S. and other major economies. If stagflation means no, or slow, economic growth combined with inflation, stagdeflation is falling prices and growth.

One could argue the term stagdeflation is gratuitous, given that deflation is normally a product of economic contraction. Yet Japan's experience in the 1990s -- and even today -- shows that the phenomenon can occur amid solid growth and, at times, rising stocks.....

SHANGHAI — China’s latest export is inflation. After falling for years, prices of Chinese goods sold in the United States have risen for the last eight months.

Soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports, according to analysts and Western companies doing business here.

The rise was a modest 2.4 percent over the last year. But even that small amount, combined with higher energy and food costs that also reflect China’s growing demands on global resources, contributed to a rise in inflation in the United States. Inflation in the United States was 4.1 percent in 2007, up from 2.5 percent in 2006.

Because of new cost pressures here, American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear and other consumer goods — just as the United States faces a possible recession.....

"Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I'm afraid it's going to be much worse," he says. "Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."

Rogers looks at the Fed's willingness to add liquidity to an already inflationary environment and sees the history of the 1970s repeating itself. Does that mean stagflation? "It is a real danger and, in fact, a probability."

NEW YORK (CNNMoney.com) -- Recession has been getting so much attention lately that it's been easy to forget about the threats posed to the U.S. economy by inflation.

But inflation worries are now back in focus in a major way. Oil prices hit a record of $101.32 a barrel in trading Wednesday, and was briefly above $100 again Thursday

Meanwhile, the Consumer Price Index, the government's key inflation reading, showed a 4.3% rise in overall prices over the past 12-months. That reading has risen steadily from only 2.0% last August. Even stripping out volatile food and energy prices, the so-called core CPI posted the biggest seasonally-adjusted one-month jump in 19 months.

If that wasn't enough to stoke inflation fears, the Federal Reserve raised its inflation forecast for 2008 Wednesday while also cutting its outlook for economic growth this year.

This prompted the Wall Street Journal to herald the return of "stagflation" -- the unwanted combination of stagnant economic growth and destructive inflation -- on its front page on Thursday. The New York Times also trotted out the word in a headline Thursday.

All of this made some market experts who have been worrying about inflation for a while chuckle on Thursday.....

Inflation eroded gains in U.S. consumer spending and a gauge of business sentiment fell to the lowest level in more than six years, pushing the economy toward a recession.

While purchases rose 0.4 percent in January, the Federal Reserve's preferred measure of inflation climbed 0.3 percent, the most in four months, the Commerce Department said today in Washington. The National Association of Purchasing Management- Chicago said its index of business activity tumbled to 44.5 in February. Readings below 50 signal a contraction.

The reports pushed Treasury notes higher and stocks down. Confidence among consumers is waning as fuel costs jump and house values slide, leaving exports to drive factory production.

``There is no growth in consumption except to keep up with price increases,'' said Chris Low, chief economist at FTN Financial in New York. ``Consumers are clearly hard-pressed to maintain their standard of living and are cutting back.''

Traders increasingly anticipate the Fed will reduce its benchmark interest rate by 0.75 percentage point at or before the March 18 meeting of policy makers, according to futures prices. The chance of a three-quarter-point cut rose to 56 percent from 36 percent yesterday and 2 percent a week ago.....

Bond investors have never been so sure that the Federal Reserve will lose control of inflation. They're so convinced that they're giving up yields just to buy debt securities that protect against rising consumer prices.

The yield on the five-year Treasury Inflation-Protected Security due in 2012 has been negative since Feb. 29, and traded today at minus 0.17 percent. The notes, which were first sold in 1997, have never before traded below zero. Even so, firms from Deutsche Asset Management to Vanguard Group Inc., the second- biggest U.S. mutual fund company, say TIPS are a bargain.

For the first time in a generation, money managers must come to grips with a central bank that's more intent on spurring the economy than restraining price increases. With oil above $100 a barrel, gold approaching $1,000 an ounce and the dollar at a record low against the euro, TIPS show investors aren't convinced Fed Chairman Ben S. Bernanke will be able to tame inflation once policy makers stop cutting interest rates.

``The way TIPS are trading now, investors believe headline inflation will stay lofty and are willing to give up the real yield for that,'' said Brian Brennan, a money manager who helps oversee $11 billion in fixed-income assets at T. Rowe Price Group Inc. based in Baltimore. Prices for the securities indicate ``a real concern of a recession and high headline inflation,'' he said.....

The U.S. may pay a steep price to free itself of its economic and financial travails: bigger government, faster inflation and a poorer country.

That would mark a reversal from the course of much of the past two decades, when Washington has been dismantling regulations, the Federal Reserve has been largely successful in containing inflation, and many Americans have felt wealthier thanks to rising home prices and cheaper imports.

``We're going to have 4 to 5 percent inflation,'' says Kenneth Rogoff, former chief economist for the International Monetary Fund who's now at Harvard University. ``The dollar will continue to drop and stay down for years. And we're going to end up with more regulation.''

The seeds of that outcome are already being planted. Fed Chairman Ben S. Bernanke and his colleagues acknowledged last week that inflation expectations may have risen, even as they cut the benchmark interest rate three-quarters of a percentage point and began lending directly to big Wall Street dealers. Lawmakers are discussing expanding the government's role in the housing market and increasing oversight of financial services.....

Forget Bear Stearns. Ignore what Ben Bernanke and Henry Paulson are up to. Take your attention away from which hedge fund is about to blow up. Think about rice.

How Federal Reserve Chairman Bernanke and U.S. Treasury Secretary Paulson tend to the credit crisis may pale in comparison with surging costs of vital foods. The price increase of rice, the staple food for about 3 billion people, to a record last week, is the real crisis in the fastest-growing region.

That's not all. ``Food is just the tip of the iceberg,'' says Ifzal Ali, chief economist at the Asian Development Bank in Manila. ``We see signs of overheating emerging everywhere in Asia.''

There are two other forces behind Asia's inflation surge, both of which have been building for years. One is asset-price gains that have their roots in low-interest-rate policies from Washington to Tokyo. The other is wages as Asians command higher pay and companies encounter skilled-labor shortages.

It's a kind of horror scenario. Yet what's most noteworthy about it is how surprised many investors and economists are.

Given how the Bank of Japan and Federal Reserve have trimmed interest rates over a number of years, these price trends were predictable. Ditto for Asia's build-up of currency reserves, which are seeping into the money supply. Also, given Asia's rapid growth, it stands to reason that wages would be rising. The ADB says Asian inflation may reach the highest in a decade this year.....

The free ride for American consumers is ending. For two generations, Americans have imported goods produced ever more cheaply from a succession of low-wage countries — first Japan and Korea, then China, and now increasingly places like Vietnam and India.

But mounting inflation in the developing world, especially Asia, is threatening that arrangement, and not just in China, where rising energy and labor costs have already made exports to the United States more expensive, but in the lower-cost alternatives to China, too.

“Inflation is the major threat to Asian countries,” said Jong-Wha Lee, the head of the Asian Development Bank’s office of regional economic integration.

It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing their rising costs on to customers......

Transfixed by turmoil in the financial markets, we may be missing the year's biggest economic story: the end of the Great American Shopping Spree. For the past quarter century, Americans have gone on an unprecedented consumption binge—for cars, TVs, longer vacations and just about anything. The consequences have been profound for both the United States and the rest of the world, and the passage to something different and unknown may not be an improvement.

It was the ever-expanding stream of consumer spending that pulled the U.S. economy forward and, to a lesser extent, did the same for the global economy (the reason: imports satisfied much of Americans' frenzied buying). How big was the consumption shove? Consider. In 1980, Americans spent 63 percent of national income (gross domestic product) on consumer goods and services. For the past five years, consumer spending equaled 70 percent of GDP. At today's income levels, the difference amounts to an extra $1 trillion annually of higher spending.

To say that the shopping spree is over does not mean that every mall in America will close. It does mean that consumers will no longer serve as the reliable engine for the rest of the economy. Consumption's expansion required Americans to save less, borrow more and spend more; that cycle now seems finished. Americans' spending will grow only as fast as income—not faster as before—and maybe a good bit slower. The implication: without another source of growth (higher investment, exports?), the economy will slow.....

(Fortune Magazine) -- Three decades ago, in a bleak stretch of the 1970s, an economic phenomenon emerged that was as ugly as its name: stagflation. It was the sound of the world hitting a wall, a combination of no growth and inflation. It created an existential crisis for the global economy, leading many to argue that the world had reached its limits of growth and prosperity. That day of reckoning was postponed, but now, after a 30-year hiatus, at least a mild bout of stagflation has returned, and matters could get much worse. We are back to the future, with the question we asked 30 years ago: How can we combine robust economic growth with tight global supplies of such critical commodities as energy, food, and water? It's worth comparing the earlier episode of stagflation with our current travails to help us find our way. In fact, this time the resource constraints will prove even harder to overcome than in the last round, since the world economy is much larger and the constraints are much tighter than before.

The similarities with the first half of the 1970s are eerie. Then as now, the world economy was growing rapidly, around 5% per year, in the lead-up to surging commodities prices. Then as now, the United States was engaged in a costly, unpopular, and unsuccessful war (Vietnam), financed by large budget deficits and foreign borrowing. The Middle East, as now, was racked by turmoil and war, notably the 1973 Arab-Israeli war. The dollar was in free fall, pushed off its strong-currency pedestal by overly expansionary U.S. monetary policy. And then as now, the surge in commodity prices was dramatic. Oil markets turned extremely tight in the early 1970s, not mainly because of the Arab oil boycott following the 1973 war, but because mounting global demand hit a limited supply. Oil prices quadrupled. Food prices also soared, fueled by strong world demand, surging fertilizer prices, and massive climate shocks, especially a powerful El Niņo in 1972.

Here we go again. Oil prices have roughly quintupled since 2002, once again the result of strong global demand running into limited global supply. World grain prices have doubled in the past year. Just as in 1972, the recent run-up in food prices is aggravated by climate shocks. Australia's drought and Europe's heat waves put a lid on grain production in 2005-06. Even the politics are strangely similar. In both 1974 and 2008, an unpopular Republican President, battling historically low approval ratings, was distracted from serious macroeconomic policymaking. The country was adrift.

Then as now, Dick Cheney was close to the helm. What's more, the erroneous lessons he took away from the 1970s contribute to the problems that haunt us today.....

NEW YORK (CNNMoney.com) -- For those struggling to deal with record gasoline and soaring food prices, there's bad news and more bad news.

Economists think inflation is here to stay. And it's likely to get worse.

A weak dollar and growing economies in emerging markets have conspired to send commodity prices higher. Those factors are unlikely to change anytime soon.

"We're more open to influences from the rest of the world than we were before," said Jay Bryson, international economist with Wachovia. "That does make it more challenging to keep inflation under control."

What's more, the Federal Reserve is relatively powerless to deal with many of these pressures.....

Three Chinese shoppers were trampled to death in November as they battled for discounted cooking oil after the price had climbed about 40 percent during the year.

Haitian Prime Minister Jacques Edouard Alexis was ousted this month amid protests over soaring food prices, which the United Nations says surged 57 percent globally in March from a year earlier.

Caterpillar Inc. plans to mark up its earthmoving equipment as much as 5 percent worldwide in July to deal with rising costs for steel, copper and oil. U.K. car enthusiasts paid an average of 75,900 pounds ($151,000) for a Range Rover Vogue SE in 2007, a 20 percent jump from '06. In April, they spent an average of 1.08 pounds per liter to fill it up, 16 percent more than a year earlier.

``We're seeing a marked increase in inflation pressure everywhere,'' says Harvard University professor Kenneth Rogoff, who was formerly chief economist at the International Monetary Fund. Rogoff says the threat may be the greatest since the 1980s.....

The U.S. economy may be suffering from its first bout of stagflation since the start of this decade, reports on housing, prices and manufacturing indicated.

Builders broke ground on 975,000 homes at an annual pace in May, the least in 17 years, and construction permits fell, the Commerce Department reported in Washington. Meanwhile, the Labor Department said producer prices jumped 1.4 percent, more than economists forecast. A further report from the Federal Reserve showed industrial production unexpectedly dropped 0.2 percent.

``The latest round of commodity-price pressure is adding to both inflation and weak growth,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``It's a pretty negative cocktail for the economy and financial markets.''

The reports underscore the Fed's dilemma as officials try to prepare investors for an interest-rate increase. Too strong a crackdown on inflation may delay an economic rebound, while waiting too long risks a price outbreak that may need even higher borrowing costs to tame.....

If you are like me, the notion that inflation could climb to double digits seems almost absurd. But have years of U.S. Federal Reserve success lulled us all into a false sense of security?

Economists tend to be cautious about the things they say in public. If, heaven forbid, you find yourself in a room filled with dismal scientists this month, you are likely to hear whispered private conversations that become almost apocalyptic about inflation.

It is by no means certain that the worst will happen, but if it does, the economic consequences could be, as they were in the early-1980s, crushing for an already weak economy.

The inflation outlook right now is as scary as it has been since Paul Volcker grabbed his lance and impaled the dragon in 1979. Back then, Volcker inherited a year-over-year consumer price inflation rate that soared to above 14 percent. His aggressive actions hurled the economy into a deep recession, but inflation ever since has remained in the single digits.....