By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

WASHINGTON — It’s starting to feel like stagflation in America. Gross domestic product rose just 1.8 percent in the first quarter, despite the injection of additional fiscal stimulus in December. At the same time, the Fed’s chosen measure of inflation — the personal consumption expenditures deflator — rose 3.8 percent. If the trends aren’t temporary and oil prices don’t retreat, the Fed may find itself scrambling.

The first-quarter rise in GDP is weaker than it looks, for two reasons. First, half of it derived from a build-up in inventories, which may weigh on future growth. Second, while most of the bipartisan December stimulus consisted of extending the Bush tax cuts, with no short-term effect on the economy, it also included a one-year reduction of 2 percent in employees’ social security contributions, estimated to cost $112 billion and entering pay packets in January. That boosted personal income, which rose at an 8.3 percent annual rate in the quarter, and should have increased growth.

Instead, prices increased so fast that even though the savings rate increased only marginally, real personal consumption rose only at a modest 2.7 percent. With government cutting back and construction weak, GDP growth was sluggish.

From this point on, there is no further stimulus available, either monetary or fiscal. Budgetary constraints are likely to cut state spending further, and inventories are unlikely to increase when growth is slow. As a result, price pressures from global commodity and energy markets may hit future GDP growth. On the inflation front, the PCE deflator is already far outstripping the Fed’s 2011 forecast range, released on April 27, of 2.1 percent to 2.8 percent, suggesting the Fed’s immobility on interest rates is producing increasingly negative real rates, boosting inflation.

The economic picture could change abruptly, as it did in 2008, when the oil and commodity price spiral reversed and inflation dissipated. Of course, that came at the cost of a major financial crash and economic downturn. There’s no easy exit.