A Whiff of Stagflation?

Too much rate hikes pricks the bubble, a slowdown would probably compel the US Fed to ease; the probable consequence…stagflation. Discerning excerpts from Mr. Paul Krugman published on the New York Times entitled “A Whiff of Stagflation”

``What's driving inflation? Not wages: labor costs have been falling, because wages are growing less than productivity. Oil prices are a big part of the story, but not all of it. Other commodity prices are also rising; health care costs are once again on the march. And a combination of capacity shortages, rising Asian demand and a weakening dollar has given industries like cement and steel new "pricing power."

``It all adds up to a mild case of stagflation: inflation is leading the Fed to tap on the brakes, even though this doesn't look or feel like a full-employment economy…Can the Fed stop raising interest rates and go back to rate cuts without causing the dollar to plunge and inflation to soar?

``Or suppose that there's some kind of oil supply disruption - or that warnings about declining production from Saudi oil fields turn out to be right. Suppose that Asian central banks decide that they already have too many dollars. Suppose that the housing bubble bursts. Any of these events could easily turn our mild case of stagflation into something much more serious.”

How serious, hyperinflation or deflation?