Stagflation, a period when inflation re-heats despite stagnant or non-existent economic growth, may be rearing its ugly head again.

And the culprit, or primary cause? The usual suspect: rising oil prices, many economists agree. Oil traded Tuesday above $70 per barrel -- a roughly 100% rise in six months.

This morning's Producer Price Index (PPI) numbers suggest that the stagflation is in full force. PPI was expected to rise 0.3% for January, and it came in way above at 0.8%. This result, which was much bigger than expected, was due to a 3.7% surge in energy prices with gasoline prices jumping by 15% -- the biggest gain in 14 months. Core PPI -- excluding gasoline and food -- was forecast to creep up 0.1% and it came in at +0.4% in January.

I was expecting PPI to rise but core PPI to drop. Unfortunately, it turns out that many companies were raising prices even as sales slumped. Auto, computer and pharmaceutical makers were among the industries boosting prices in January even as sales fell. Why did they do this? It could be because they needed to make up the revenue that they knew they would lose due to declining unit sales by raising prices on people who had to buy their products.

Ted Allrich is the founder of The Online Investor and author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he'll offer advice to investors who are just getting started.

The economy is going through something right now, but it's hard to know what. Is it deflation, stagflation, inflation or something else?

The definition of deflation is: A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.

Interest rates remain on hold across the pond.

The European Central Bank and the Bank of England kept benchmark, short-term interest rates the same Thursday, as the major central banks chose to take a wait-and-see stance amid the competing challenges of rising inflation and slowing growth.

The ECB kept its key rate, the refinance rate, at 4.25%; the BOE, its rate on commercial bank reserves, at 5%.

The euro and British pound were little changed versus the dollar after the decision. The euro strengthened about three-tenths of a cent to $1.541 and the British pound strengthened one-quarter cent to $1.9516 in Thursday afternoon trading in Europe.

Rates: tougher call for BOE

London-based economist Mark Chandler told BloggingStocks Thursday the Bank of England's circumstance is "a tougher call for monetary policy markers" than the ECB's.

"In the U.K., inflation is rising and the growth outlook is not good, whereas [continental] Europe has a better GDP outlook. So in that sense the Bank of England has a difficult task, similar to the U.S. Federal Reserve's. They have to find a way to bring down inflation from about 4% to 2% without causing a deeper contraction," Chandler said. "Given slowing growth right now, the best stance was to do nothing." The BOE has cut interest rates three times since December 2007.

We're back to the 1970s. The Washington Post reports that the Fed's Beige Book suggests that growth is stagnant and prices are rising. That's an economic condition known as stagflation -- slow growth and high prices. That's bad news for policymakers and investors.

I first posted about Stagflation back in May 2006. What is striking to me is that the price of oil was $69 a barrel back then and it's almost double that now. Back then I noted that stagflation "prevailed in the US during the 1970s. For example, in 1979, US core inflation, excluding oil and food, rose at a 9.4% annual rate, GDP grew at roughly 3%, and unemployment averaged 6%. Furthermore, this condition was bad for stocks which rose an anemic 0.37% annual average during the decade." I also wrote about stagflation here and here.

Here are three key findings from the Beige Book:

• Weak retail spending - The Post reported that consumer spending was weak, despite the economic stimulus checks from the government that went out starting in May. There was some demand for electronics, and discount stores got a temporary boost. But discretionary spending froze on housing-related items and vacations.

It's a European anti-inflation campaign that will require boldness, creativity, and patience.

That was how one economist described a potential monetary policy tack by the European Central Bank (ECB) for the quarters ahead.

London-based economist Mark Chandler told BloggingStocks that typically, a central bank will increase interest rates to fight inflation. Paradoxically, he's not recommending that the ECB do that now.

"It is a bit of a paradox, but if the ECB raises interest rates it may have the effect of, in fact, increasing inflation," Chandler said. (Euro-zone inflation is presently running at about a 3.7% annualized rate -- well above the ECB 2.0% limit, according to Eurostat.)

Contain commodities prices, contain inflation

Here's how an interest rate hike may hurt inflation's cause: a rate hike would put the euro, once again, in a superior investment position versus the U.S. dollar, causing the already-weak dollar to fall more, Chandler said. As the dollar continues to fall, commodity prices -- including oil -- will continue to rise, as investors seek to preserve purchasing power of the decreased value of dollar-denominated commodities, and as a general inflation hedge.

Just call it stagflation, updated for the globalization era.

Oil's record, 5-year rise, combined with increasing food costs, have increased inflation, reduced disposable income, and slowed the U.S. economy to a crawl, when combined with the effects of the end of the housing boom.

The above sounds like a prescription for a replay of the 1970s' stagflation era, but is it? Not quite, according to Stephen Cecchetti, professor of economics at the Brandeis University International Business School.

Cecchetti told Bloomberg News Thursday a more-flexible economy, with lower stockpiles of goods, increased fuel efficiency, increased worker productivity, and lower wage increases for employees are among the economic differences separating the 1970s and 2008 U.S. economies. As a result, Cecchetti doesn't see a repeat of the 1970s' high inflation/high unemployment levels.

Economist David H. Wang concurred with the above conclusion, but argued that the two major factors in the nation's enhanced ability to cope with large increases in commodity costs and other negative economic factors are energy efficiency and worker productivity.

Fed Chairman Ben Bernanke was in Massachusetts on Monday, speaking at a conference, according to this article. As you can imagine, he had some things to say about the economy. Believe it or not, they were actually encouraging, and it should cause many to feel at least a little more comfortable, even though the world appears to be ending thanks to really expensive oil futures. In fact, if Bernanke is to be believed, we don't have a lot to worry about.

Well, we do have to worry about a few things, but Bernanke believes that a "substantial downfall" in the economy is not as guaranteed as recent market action has suggested. I'm not sure if he's correct about this. With gas prices hitting a record of an average $4 per gallon, the psychological fallout is going to be immense. Add to that the recent employment data, and the economy seems to have found a wonderful recipe for disaster. But what I like about Bernanke's comments is that they too can hold psychological sway. He believes that the net outlook isn't any worse than before, and many observers suspect that he is done lowering rates. While some might look upon that stance as a harbinger of positive tidings, I think we have to remember that Bernanke's hands are tied right now, and that he has been put in a damned-if-you-do-damned-if-you-don't scenario. If he drops rates any further, then the dollar becomes less valuable on a global basis and inflation becomes increasingly problematic. If he pauses, then what about growth? It all goes back to oil and the dreaded specter of stagflation.

"The markets seemed on the verge of a major sea change," says economist David Smith. In his Cyclical Investing Quarterly, he offers a fascinating review of his concerns for the risks that lie ahead.

"Recent economic data provides considerable foundation for Main Street fears and little support for Wall Street hopes.

"Two of the economy's mainstays, housing and autos, continue to tank and consumers are being squeezed between falling real incomes and rising cost of living – notably in energy and food, the two components eliminated from the 'core' inflation indices by those who claim inflation is 'under control.'

"The consequences of these economic stresses can be seen in falling consumer confidence, weak consumer spending, rising bankruptcies among retailers and defaults among un-creditworthy borrowers.

"The knock-on effects include a global crisis in the financial sector, a pullback in U.S. business spending,
mounting layoffs and an uptrend in unemployment, all of which, in my view, pretty much puts the nail in the coffin of the Goldilocks scenario.

"This view is seconded by chief executive officers in the financial-services industry, who placed the likelihood of a recession at 88%, with one in three putting the odds at 100%.

Growth is slowing in all regions of the world, and inflation is rising, but the International Monetary Fund's No. 2 person in charge says a repeat of the 1970s stagflation period isn't likely.

IMF First Deputy Managing Director John Lipsky said the "inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability," Bloomberg News reported Thursday. However, Lipsky added that a return to 1970s-style stagflation isn't likely, but it cannot be totally ruled out.

Oil, commodity-rooted inflation

Further, Lipsky underscored that the current inflation rise is being driven by a fundamental increase in demand for commodities, primarily oil, and to a lesser extent by supply constraints around the world, Thomson Financial reported Thursday via Forbes.com. Hence, the recent price increases are likely to prove finite, Lipsky added, unless these items keep rising more rapidly than other items.

Economist David H. Wang told BloggingStocks Thursday he agreed with Lipsky's categorization of the most-recent rise in inflation but added that government subsidies may prevent a pullback in commodity prices, especially oil. Classic economic theory holds that as the price of a good rises, people will use less of it. However, governments in China, Venezuela and the Middle East, among other nations, subsidize gasoline/fuel, lowering its cost, which discourages conservation, Wang said. The United States does not subsidize motor fuel at the federal level, but individual states do subsidize heating oil/natural gas for low-income citizens.

Inflation, public enemy No. 1 in the 1970s in the United States, appears to be regaining its former title in the first decade of the 21st century.

But is it here to stay? That depends on the data you're looking at, most economists agree. U.S. inflation is trending higher, but whether it is more structural or cyclical (simply a product of current demand conditions), is the focus of debate in economics circles.

Structural view

Economist Peter Dawson says structural changes are occurring that will keep inflation well above the U.S. Federal Reserve's 2-2.5% comfort zone for years. Those changes include strong demand for commodities in both emerging and developed economies, the U.S. budget deficit and trade deficit, and the weak U.S. dollar.

"What we're seeing today, in my view, is a new economic age. It's not a cliché. We have more than half the world developing at the same time and it has and will continue to place pressure on commodity prices, oil being the first, but now grains / food stuffs and minerals following close behind," Dawson said. "This is creating a whole new cost layer not only in the U.S., but around the world."

A classic market theorist, Dawson does expect higher prices to do what they're supposed to do, eventually: reduce demand. However, with regard to grains, it's difficult to predict the level at which demand will ebb, due to government subsidies. Meanwhile, oil, he said, "is reaching its zenith, probably at $125 per barrel." Further, Dawson believes a sustained $100 oil price will "propel the development of cheaper, alternative energy sources in the next decade" that will enable sufficient global economic growth. But until commodity demand cools and new energy forms arise, you can expect above-average inflation, both in the U.S. and globally.

In his Street Smart Report, market historian and seasonal timing expert Sy Harding takes an in-depth look at the economic outlook, explaining the Fed's concerns over inflation and potential stagflation.

"Investors in their thirties and forties often don't understand why the Federal Reserve sometimes becomes very worried about inflation.

"Their experience has been that, sure, the price of most everything rises over the long-term. But so what? They now pay $30,000 for automobiles their parents paid $10,000 for, and their grandparents bought for $2,000. Homes that sold for $50,000 in a previous generation now sell for $250,000.

"But their income has grown even faster, so their standard of living is significantly higher than it would have been fifty years ago. So what's to worry about inflation?

The Associated Press reports that wholesale inflation rose 1% in January, its fastest rate in 16 years. This is another piece of evidence that the Fed's rapid interest rate cuts are having their expected effect -- reinforcing inflation. And as more economists forecast a recession this year, the looming specter of stagflation approaches ever more closely.

This means that the market will fall this morning, right? Actually, it looks like despite the good news about bond insurers maintaining their AAA ratings, the market has reversed its early upward direction and turned south because the inflation news was worse than expected. This change in the market makes sense to me.

As I pointed out in my stagflation post, these short-term fluctuations are not meaningful for long-term investors. What may be of interest is that during the 1970s -- a period of low economic growth and high inflation -- the market was essentially flat for a decade. It took a 19% Fed Funds rate from then Chairman Paul Volcker to break the back of inflationary expectations and get us on a path of growth.

The New York Times and the Wall Street Journal [subscription required] are both leading with stories about stagflation -- that combination of slow growth and high inflation last seen during the 1970s. Stagflation has been discussed occasionally in the last several months. I posted about it here and here. That first post, written back in May 2006, is interesting to me because much of it could have been written today.

The stagflated U.S. economy is contributing to the record low, 19% approval rating, for the fellow using Air Force One to visit his fans in Africa. (79% of the public disapproves of his handling of the economy.) His support of subprime mortgages in exchange for contributions from lender Ameriquest along with his $1.3 trillion worth of tax cuts, $9.2 trillion worth of Federal debt, and $2.4 trillion worth of wars have put the U.S. on a precarious financial footing -- hence stagflation concerns.

Here are two reasons stagflation matters to you:

• Bills will grow but income won't. Inflation -- as reported by the government -- was up 4.3%. But anyone who has bought gasoline, heating oil, food, or just about anything else has watched their expenses rise dramatically. Crude oil topped $100 a barrel yesterday and wheat is at a record high. Meanwhile, incomes have stagnated -- declining in relation to inflation in the last seven years. With gold nearing $1,000 an ounce, it's clear that many investors have lost confidence in the Fed's willingness to control inflation.

What does the coming year hold for the economy? BloggingStocks' Peter Cohan considers five issues that will factor heavily in 2008.

Stagflation -- high inflation coupled with weak growth -- is a risk. The latest inflation statistics suggest that inflation is running at a 4.2% annual rate. That's way above the 1% to 2% range that then Fed targets. And by cutting rates, the Fed is contributing to inflation. Energy, food, metals, and other commodity prices are rising due to demand from China and India. But the Fed contributes to the price increases because oil prices are denominated in dollars. When the Fed cuts rates, the value of the dollar drops and the price of oil rises, so inflation is certainly going to rise.

The question remains whether the economy will slow down or whether the stimulus from lower rates will keep it growing. My hunch is that the key to economic growth will be the availability of credit for consumers and businesses. As long as U.S. businesses can get enough capital to keep growing and meeting demand from China and India, they will keep people employed. The weaker dollar actually helps the competitiveness of these U.S. exporters since their goods are cheaper in the international markets compared to those of European manufacturers, whose prices are denominated in more valuable euros.

And as long as people remain employed, they will be able to use their credit cards to keep buying things.