For the Federal Reserve, policymaking these days is about deciding which of two imposing evils to take on — a decidedly moribund economy or the increasing threat that inflation poses to battered consumers.
For much of the slow slog out of the financial crisis, the Fedwhich is meeting this week and will issue its policy statement Wednesday, has managed to train its gaze on jump-starting growth through its various quantitative easingmeasures.
But recent indicators show that inflation is posing an equally daunting threat that further monetary accommodation from the Fed might serve only to aggravate.
The pressure has come primarily through measures that Fed Chairman Ben Bernanke likes to call "transitory" — namely, the volatile but steady rise of food and energy pricesthat don't make up core inflation measures but usually impact consumers more.
Economists increasingly believe that while the so-called core Consumer Price Index (CPI) measure has remained around the 2 percent level that pleases the Fed, headline inflation that includes things such as groceries and gasoline is becoming a growing menace. The more inclusive inflation measure is at 3.9 percent and hammering at consumers, including the 14 million who remain unemployed.
"Contrary to some monetary policymaker protestations, we believe the rise in food and energy costs is highly unlikely to be temporary, although weaker global growth is likely to slow the rate of projected future gains," Joseph A. LaVorgna, chief U.S. economist at Deutsche Bank, wrote in an analysis.
Indeed, many economists believe that inflation pressures could be in for a temporary easing in coming months. The prices paid index in Tuesday's Institute for Supply Manufacturing release, for instance, showed a huge drop. Conversely, the Chicago Fed on Monday reported a strong increase in its own prices paid index.
At the same time, continued growth in emerging market economies will help put a floor under any drop in food and energy prices.
Expecting food and energy prices to drop does not jibe with recent history, which shows that over the past 24 years there has never been a five-year period where those two categories showed decreases, LaVorgna said.
Moreover, even core inflation faces pressure from rising rents, which have kept the CPI low as the housing market struggles through its worst conditions since the Great Depression. A category known as "owners' equivalent rent" makes up 40 percent of the government's core measure, and has moved little over the past three years.
That has changed lately, however, with primary resident rent up 3.5 percent annualized as of September, while owners' equivalent rent — a government statistic that gauges how much homeowners could charge to rent out their houses — was up 2.4 percent.
For 2011, core CPI is up 2.4 percent, putting additional pressure on the Fed.
The central bank deals with inflation as part of its dual mandate to maintain steady employment and keep prices under control.
Critics say the various measures the Fed has taken to buy government debtto spur the economy also have planted the seeds for inflation by increasing the money supply and dropping the value of the U.S. dollar, which in turn makes commodities cheaper in foreign currencies and drives prices higher.
The two most widely used measures of money supply have been increasing sharply.
M1, which includes currency, travelers checks, and demand and other deposits, is up 21 percent over the past year. At the same time, M2, a more closely watched inflation gauge that includes M1 plus savings and time deposits and retail money funds, has risen 10 percent.
Goldman Sachs economist Jan Hatzius attributed the rise in M2 both to the Fed's quantitative easing measures as well as uncertainty about the state of financial markets that has caused individuals to sock away money in assets that contribute to money supply indicators.
Under some conditions, an increase in money supply could mean the economy is primed for growth ahead once that cash gets put to work, but not in this case, Hatzius said.
"Growth in the money stock was traditionally considered a leading indicator," he wrote in a note to clients. "However, the likely factors behind the recent pickup do not seem consistent with a sudden acceleration in growth."
What the pickup could be, then, is a simple market reaction to the Fed and its counterpart across the Atlantic, the European Central Bank , continuing money injections as generating a lasting recovery eclipses inflation fears.
"Because of the level of debt that we have in this country and indeed over in Europe as well, market forces demand deflationary depression to occur," said Michael Pento, president of Pento Portfolio Strategies and economist at Agora Financial. "But because we have such an activist Federal Reserve and central bank in Europe, every time they step into manipulating the market by depreciating the currency, we have these huge spikes in inflation."
Nearly half the respondents in a CNBC survey of financial experts believe the Fed will launch more easing measures in the next year.
Pento advises investors to disregard pronouncements from the Fed that inflation is under control.
"They're being mendacious," he said. "They are trying to fool you into believing that inflation is not a problem."