Prices pose dilemma for Fed

The combination of inflation and faltering growth -- the infamous "stagflation" of the 1970s -- creates a potential double bind for economic policymakers: Fight one and risk feeding the other.

To the amazement of many analysts, however, the Federal Reserve, under Chairman Ben S. Bernanke, signaled that it had already decided how it would address that dilemma. The plan is to tackle the slowdown through continued interest rate cuts while accepting the risk of higher prices.

In the minutes of its late-January meetings and several conference calls released Wednesday, central bank officials made it clear that they would go for growth.

"In 2007, they were balancing their two objectives of price stability and sustainable economic growth," said Vincent Reinhart, former director of the Fed's division of monetary affairs. But now, "they care about growth first. They're going to take a chance with inflation, and if you look at their projections, they think they can get away with it."

The danger is that prices will get out of hand as they did in the 1970s and as they hinted at doing again in the report of January inflation.

The 0.4% increase in the overall consumer price index reported for last month was higher than analysts had expected. But in the latest report, it was striking that the increases were not limited to the usual suspects, food and energy. Instead, they also involved categories that had fallen or remained stable previously -- and thus had helped offset the recurrent food and energy increases.

Computer prices, for example, which had tumbled 12% over the last year, climbed 1% last month, according to Stephen G. Cecchetti, former research director of the New York Federal Reserve Bank. And restaurant meals, which had been stable, rose at a 4.9% annual rate, he said.

In January, "you have to look with a microscope to find falling prices. At the level of detail normally reported . . . more than three-quarters of prices rose," said Cecchetti, now an economist with Brandeis University.

The price index's 12-month change through January was 4.3%. By contrast, the index's annualized rate of change stayed mostly between 2% and 3.5% from 2002 through 2006 -- even as the economy picked up speed.