The CPI report released today by the Labor Department recorded the increase in consumer price inflation at 0.4%, the fastest rate in 10 months. But on Tuesday, Chairman Ben Bernanke and the Federal Reserve referred to inflation as “subdued.” The Fed also said that “Longer-term inflation expectations have remained stable.”

Despite rising inflation, the Federal Reserve is unlikely to act. The Fed’s favored inflation measure, Core CPI was 2.2% year-over-year, only slightly above the target level of 2%. But pushing headline inflation higher was an uptick in the price of energy, with gasoline prices spiking 6 percent. The implications for future core inflation are not good. As San Francisco Fed economist Michele Cavallo explained in 2008:

Rising oil prices tend also to affect the core portion of the CPI indirectly, because energy prices represent a considerable portion of the production cost for many of the items in it, such as transportation services.  In addition, if workers have to pay higher energy prices themselves, they may bargain for compensating wage increases, which also increases the production costs of items in the core CPI. The extent to which rising oil prices translate into higher core inflation through higher production costs depends, among other things, on how much they break into the overall inflation expectations of those who set prices and wages. In fact, if rising oil prices lead to higher inflation expectations over the longer term, rising energy and wage costs are more likely to be passed through in terms of rising consumer prices. In this case, rising oil prices may lead to sustained increases in the core portion of the CPI, that is, to an increase in core inflation.

In other words, the cost of allowing inflation in energy prices today may be accelerated inflation in core consumer goods tomorrow.

Pundits disagree that inflation expectations are “stable.” “’Sudden” is more like it.’” writes Amity Shlaes in Watch Bernanke’s ‘Little’ Inflation Capsize U.S. Shlaes puts the unpredictability of inflation into stark perspective.

All appeared calm in 1972, too, before inflation jumped to 11 percent by 1974, and stayed high for the rest of the decade, diminishing the quality of life for whole cohorts. They paid the higher interest rates needed to reduce the inflation, and got a house with one less bedroom. Or no pool.

The architect of those higher interest rates, Paul Volcker, has also been edgy about possible future inflation. Volcker said of allowing faster inflation, “You are not going to get any stimulus and you are going to make it much harder to restore price stability.”

The Federal Reserve is playing with fire. America’s savers and retirees are in its path.