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.

The WSJ points out that retailers like Kohl’s, Gottschalks, and Bon-Ton Stores saw sales plunge double digits in December, the month retailers make much of their profit:

Bon-Ton, based in York, Pa., is trying to manage a substantial debt load as the retail outlook worsens. It employs about 33,000 at 280 stores across the Northeast and Midwest. In 2006, when money was cheap, it took on more than $1.7 billion in debt to buy 142 former Saks stores from Northern Department Store Group…

Last week, Moody’s lowered the company’s credit rating by one notch, saying that poor consumer traffic over the holidays could force the company to resort to “heavy markdowns.” The ratings agency said that it believes that over the next 12 to 18 months, Bon-Ton’s cash flow “will not be sufficient to cover all of the cash requirements, including the working-capital needs….Bon-Ton has limited alternative sources of liquidity since all of its assets are pledged to the bank facility and mortgage loans.”

The Journal puts the bankruptcies in excellent context on its page one, and makes the NYT’s C3 story look embarrassingly near-sighted, though better than the FT, which ignored the story entirely.

3Com’s purchase by Bain Capital and a Chinese firm fell through after the U.S. government balked at the national-security implications of allowing the latter to own the technology company.

The adorable Brits at the FT headline their story “China fears scupper $2bn deal for 3Com” and say the shoot-down is evidence of rising protectionist sentiment in the U.S. The Chinese would have had a minority stake in 3Com, but the company sells security software to the American government, and despite offers by Bain to spin off that division, a panel that reviews foreign investment declined to support the transaction.

The WSJ frames the story as a bad omen for the deal-making business, which has become more dependent on foreign capital, especially as the dollar has dropped in value. Both it and the FT say the move will have repercussions for U.S. businesses in China.

We say good for the government for putting national security over multinational business interests by blocking the sale of a significant stake in a sensitive technology company to a firm with Chinese military ties.

The Supreme Court ruled workers can sue their employees for screwing up their 401(k) accounts in a unanimous decision that The Washington Post splashes on its page one. The NYT puts it on its business front, but the WSJ, despite dropping it on its personal-finance cover, has the best story.

This case looks like a no-brainer, but it’s still surprising to see this court rule unanimously in favor of workers over their employers, and even more surprising to see the Bush administration celebrate it despite the fact that, as the Post says: “Business advocates predicted the ruling would unleash a raft of lawsuits by employees.”

The FT goes deep with a good analysis of the impact the troubles of the monoline bond-insurer business is having. The salmon-colored fish wrap does a good job of weaving a lot of threads together.

One thing we note in its story is how the language reporters are using to describe what’s happening in our markets is becoming more dire (and, we say, realistic). We’re noticing an up-tick in usage of words like contagion, domino effect, chain reaction, etc.

The Atlanta Journal-Constitution reports that tippers are becoming tightwads, a result of the economic downturn:

Belt-tightening helps waitress Ebony Thomas pay for groceries and other essentials. She used to earn $300 to $500 a week in tips working at the Depeaux restaurant in Decatur. Not anymore.

“When I tell you it’s been dead, it’s been dead,” said the 24-year-old mother of two. She also works at a day care center and is finishing her last year at Atlanta Metropolitan College.

Beazer Homes is bailing out of Charlotte a year after the Observer, in one of the finest investigations we’ve seen in a long time, found that the company’s homes had higher rates of foreclosures than those of other builders and that it helped put buyers in homes they couldn’t pay for.

We had to go searching for the link to that investigation. If we were the Observer, we’d splatter that on every somehow-related story we could.

Nothing worth reporting from The Dallas Morning News, but we just want to say to them, “Good God, people! Get a new Web site!

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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 rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.