Could It Be... Stagflation?

Wednesday, the Labor Department reported that the Consumer Price Index, the headliner of U.S. inflation gauges, rose 0.6 percent in January of this year, the biggest increase since last March and double economists' forecasts. The report blamed big price increases for natural gas (17.4 percent, the largest one-month increase on record), cigarettes (2 percent) and housing (1 percent).

For inflation-watchers, the report is worrisome but inconclusive — which fits in perfectly with the glum mood in economic circles these days. TIME personal finance columnist Dan Kadlec takes us through the implications of the CPI report.

TIME.com: Inflation was supposed to be the last thing we had to worry about this spring. Is it back from the dead?

DK: Well, one report is not a trend. But certainly, if price pressures continue the Fed will not be cutting interest rates as aggressively as we've been expecting it to. And this report has probably eliminated the possibility of another between-the-meetings cut before the March 20 meeting, like we saw Greenspan do in early January.

But if this keeps up, it means we're entering the worst of all worlds — one when inflation is going up, and economic growth is going down. That's stagflation, which we saw in the '70s, and it really ties the Fed's hands in terms of what it can do. It's way too early to sound the alarm on that just yet. But for the markets, it's on their radar screen.

The news certainly didn't spark a rally Wednesday on Wall Street.

DK: Pretty much all stocks are interest-rate-sensitive, and anything that pushes aggressive rate-cutting farther down the road is going to be bad news. The Dow is taking it harder because it's been doing reasonably well lately — the NASDAQ stayed pretty level because it's already sitting on a 52-week low, and there isn't much downside left.

Any upside?

DK: Not much of that either.

So what's the big picture for spring, and does the CPI report change that?

DK: We're in a very ugly spot, and the mixed-signals CPI report only reinforces it. The biggest problem out there is a lack of clarity on how far this slowdown is going to go, and what it's going to look like. There's a real lack of vision as to what first-quarter earnings will be like — when even the CEOs say they don't know, then everybody's in the dark. And the response from the Street is, sell 'em and see what happens.

There's just no clarity about the economic picture right now. Maybe inflation's on the rise. Maybe we're headed into a recession. Maybe neither of those. What's plaguing the market these days, more than a ton of sellers, is an absence of buyers — nobody knows what's next, so nobody wants to step up and make a bet.

Including the Fed.

DK: All this uncertainty puts us in the worst possible spot, until things start to get better. Unless, of course, they get worse.