A Whiff of Stagflation (Paul Krugman column)

By PAUL KRUGMAN

In the 1970's soaring prices of oil and other commodities led to stagflation - a combination of high inflation and high unemployment, which left no good policy options. If the Fed cut interest rates to create jobs, it risked causing an inflationary spiral; if it raised interest rates to bring inflation down, it would further increase unemployment.

Can it happen again?

Last week fears of a return to stagflation sent stock prices to a five-month low. What few seem to have noticed, however, is that a mild form of stagflation - rising inflation in an economy still well short of full employment - has already arrived.

True, measured unemployment isn't bad by historical standards, and inflation is in the low single digits. But inflation is creeping up, and it's doing so despite a labor market that is in worse shape than the official unemployment rate suggests.