WASHINGTON (MarketWatch) — With the economy softening in the past few months and inflation accelerating, you hear a lot of talk about stagflation — that ugly combination of low growth and high inflation that plagued the economy for much of the 1970s and early 1980s.

Inflation is certainly accelerating. In the past six months, the consumer price index has risen at a 5.1% annual rate, while core inflation (which, as everyone knows, excludes volatile food and energy prices) has risen at a 2.1% annual rate. See our full report on the 0.2% rise in the consumer-price index.

That’s much faster than prices were rising as little as six months ago. By way of comparison, the CPI rose at a 3.1% annual rate in the last six months of 2010 and the core rate rose at a 0.8% rate.

Inflation is accelerating, but remains far below the 16% rates of the 1970s and 1980s.

However, inflation rates are nowhere near the levels seen 30 or 40 years ago, when the CPI rose as much as 15.9% and the core rate rose 15.4%. Now that was inflation!

Inflation is becoming a concern, but it’s not yet the disaster it was when Paul Volcker came to town in 1979.

Anemic growth is the bigger worry for us right now, especially the slow increase in jobs. With millions of unemployed Americans willing to work for less, wages aren’t growing very fast. Over the past six months, the purchasing power of the average paycheck has fallen at a 3.2% annual rate.

It’s not so much that rents, and gas and food prices are soaring; it’s that our paychecks aren’t keeping up.

So, while the inflation data released were awful enough by themselves, what was worse was that other data released Wednesday hinted that growth is slowing further.

We seem to have contracted a mild case of stagflation.

Manufacturing numbers disappoint

The Empire State manufacturing index from the New York Fed fell into negative territory, suggesting production and new orders in New York actually contracted in June. The manufacturing sector has been a star performer in an otherwise lackluster economy. (On the brighter side, the national industrial production report for May indicated that factory output expanded at a healthy clip during the month, despite the supply disruptions from Japan’s earthquake.) Read our full report on the manufacturing sector.

Another report on business sentiment showed that no one should expect home builders to ride to the rescue any time soon. The home builders’ index dropped back to 13 in June, meaning that only about 1 in 12 builders thinks the market is good. Read report on the decline in builders’ sentiment.

All this dismal news led a major economic forecasting firm to lower its forecast for growth in the current (second) quarter down to a 1.9% annual rate. If Macroeconomic Advisers is right, it would be the second straight quarter with growth below 2%.

In order to get any job growth at all, the economy needs to grow closer to 3%, and what we’d really like to see is a couple of years of 5% to 7% growth.

Slow growth and high inflation is putting the Fed into an extremely uncomfortable place, with few good options. Raising interest rates could keep prices from rising faster, but at the cost of putting the brakes on growth.

For now, the Fed is sticking with its forecast that growth will accelerate and inflation will moderate on their own.

—Rex Nutting