Stagflation fears lead the front pages of the business press today after the Federal Reserve sharply cut its growth estimates and inflation reports came in high.

The Fed cut growth estimates for the year to 1.3 percent to 2 percent, anemic numbers that still seem too high (the Financial Times reports the IMF expects 0.8 percent growth), while the annual inflation rate jumped to a near sixteen-year high of 4.3 percent last month.

Those numbers are an economist’s nightmare, conjuring flashbacks to the dismal 1970s economy of Nixon, Carter, price controls, and oil shocks. Yet the Fed’s growth estimates seem too high for an economy that’s probably already in recession, one that the economist Martin Feldstein yesterday warned could be deeper and longer than the sixteen-month downturn of 1981, which itself was the worst since the Great Depression.

The Wall Street Journal and New York Times each lead their stories with the fact that the specter of stagflation will effectively tie the Fed in knots as it tries to navigate the American economy away from the shoals of the credit crisis. The WSJ says:

A simultaneous rise in unemployment and inflation poses a dilemma for Fed Chairman Ben Bernanke. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It’s impossible to do both at the same time.

The NYT says some markets are ignoring the Fed’s moves anyway—Mortgage rates, for instance, have “edged up steadily” this month despite the 1.25 percentage-point slashing of interest rates in January.

The papers say the Fed is willing to risk higher inflation to boost the economy, but if the growth outlook improves will quickly reverse its rate cuts.

Still, the rise in commodities like wheat, gold, and oil leads some to predict the end of the post-70s era of benign inflation.

“The period of falling inflation that we have been in for all the ‘80s and ‘90s and early 2000s has come to an end,” said Michael Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “That is over.”

The Los Angeles Times reports that the Fed’s openness about its tilt toward promoting growth instead of fearing inflation will itself help boost price increases.

Workers are already getting slammed, according to the Associated Press. It reports that inflation-adjusted earnings have fallen 1.2 percent in the last year, including a scary half-percent plunge in January from the month before. A good part of that pinch is coming from energy prices, and oil hit another non-inflation-adjusted record yesterday of $101.32 a barrel before settling at $100.74.

Finally, the WSJ reports that the Fed met in early January and decided not to cut rates just two weeks before an alarming decline in stock markets forced it to slash them by a record 0.75 percentage points.

Bloomberg and the FT report that credit markets saw a sharp jump in the cost of insuring credit risk yesterday, to record highs. The WSJ, NYT and others seem not to have noticed. The cost of buying credit protection on investment-grade corporate bonds skyrocketed to 20 percent yesterday as investors panicked while in trying to buy insurance against, well, further panics.

Which leads us to our Quote of the Day:

“The market is full of rumors of unwinding of CDOs, and the price action suggests that people believe the rumors,” said Peter Duenas-Brckovitch, head of European credit trading at Lehman Brothers Holdings Inc. in London. “It sort of has that Armageddon feel, and the market is feeding on itself.”

The soaring insurance prices will make it more costly for companies to borrow, at a time when they can ill afford it.

The impact of the confluence of consumers pulling back on spending and banks on lending is beginning to be felt across the economy. Yesterday, retailers The Sharper Image and Lillian Vernon filed for bankruptcy protection.

While the two companies have had problems for years, until the last few months the favorable credit environment has propped up companies that should have failed earlier. Retail bankruptcies have for years been near record lows. Now, with the legs knocked out from under lending, expect corporate bankruptcies to soar, especially retailers who are also being hit by plummeting consumer confidence after years of aggressively expanding their stores’ footprints.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.