The Chicken Little in all of us should have been aroused by two headlines last week, headlines written before OPEC's president advised that a barrel of oil may fetch more than $150 this year.

One came from Chinese steel producer Baosteel, which agreed to pay at least 80 percent more for iron ore. The other was issued by Dow Chemical, which, after raising prices as much as 20 percent this month, said customers will pay up to 25 percent more in July.

Price increases of this magnitude usually dampen demand for a host of goods. Buyers sit on their hands until the economy slows so much that sellers are forced to lower prices.

There are plenty of rational observers who believe that the normal course of events may not unfold as rapidly this time around.

Revised figures out of Washington indicate the economy grew 1 percent in the first quarter, an improvement over the 0.6 percent growth reported in the fourth quarter. Meanwhile, inflation ran at a 3.6 percent clip, or 2.3 percent excluding food and energy (a measure of interest to only economists and those who have sold their cars and are on hunger strikes).

Economists refer to the unseemly combination of feeble growth and vigorous pricing as stagflation. It's sort of like driving with one foot on the accelerator and the other on the brake, says Thomas H. Atteberry of First Pacific Advisors in Los Angeles.

"The car kind of shakes a lot," Mr. Atteberry said.

Which is pretty much the way the economy and financial markets are behaving. If you haven't heard of stagflation before, you'll probably hear it in the months ahead as the Federal Reserve treads the fine line between keeping interest rates too low and igniting inflation, and raising them too much and strangling the economy.

It could be that the Fed can win only one of those wars at a time.

"Looking at the widespread price hike announcements, it appears as if higher prices are coming whether or not the economy slows," Argus Research Richard Yamarone wrote to clients last week.

Mr. Yamarone, director of economic research for the New York firm, believes that demand is immune to the price boosts because of countries such as China and India. As those countries industrialize, their demand for oil and other commodities more than compensates for slackening U.S. demand.

"Supply is diminishing because demand is coming from a part of the world that was never there before," he said. "That's why I don't think this is a transient situation."

The weak U.S. dollar compounds the problem. While a boon to U.S.-based exporters, it stokes inflation by raising the price U.S. consumers pay for oil and other imported goods.

"Inflation is potentially a very serious problem," said John Milne of JK Milne Asset Management in Station Square. "At some point, [the Fed] has to be concerned about the deterioration in the buying power of the dollar."

The U.S. economy's last major bout of stagflation occurred in the 1970s, a decade also plagued by higher energy prices. Back then, the malady wasn't cured until 30-year Treasury bonds topped 15 percent, the prime rate exceeded 21 percent, 30-year mortgages were available at 18 percent and unemployment approached 10 percent.

Currently, 30-year Treasuries are priced at 4.5 percent, the prime rate is 5 percent, 30-year mortgages are going for a little more than 6 percent and the unemployment rate is 5.5 percent.

While the Fed last week expressed concern about the slowing economy, it believes that those threats have diminished while the risk of inflation has increased. In the long run, that means interest rates are headed higher. Many believe that the Fed won't act until late this year or early next year.

"The economy still doesn't have enough traction where you could tighten and risk not sending growth negative," said Robert Ostrowski, chief investment officer for Federated Investors taxable fixed income group.

While data released Friday showed economic stimulus checks caused the largest spike in monthly after-tax income in 33 years, many do not expect the lubricant will be long-lasting.

"It's becoming less likely that the second half is an improvement over the first half," said Malcolm Polley, chief investment officer of Stewart Capital Advisors in Indiana, Pa. "We think stagflation is a real potential problem. The answer will be relatively painful. It will be higher interest rates."

Since bond prices fall when interest rates rise, these are unsettling times for bond investors. Mr. Atteberry is buying shorter term debt and federally backed mortgages issued before 2005, which are lower risk. Mr. Ostrowski is doing similar things at Federated, as well as looking for higher quality debt.

As bad as things could get, Mr. Yamarone isn't looking for a repeat of the 1970s. He points out that consumer spending has increased for 65 consecutive quarters despite the stock market bubble, economic crises in Asia and Russia, Sept. 11 and other calamities.

"I don't think that anything going on right now is any worse," said Mr. Yamarone.

In this age of diminished expectations, cold comfort may be the only comfort we can afford.