If it wasn't before, the inflation alarm is wailing at the Federal Reserve today. The government reports the Consumer Price Index surged 1.1 percent in June, an annual rate of more than 13 percent.

Not surprisingly, the increase was led by food and energy prices. But there are signs the high costs of those commodities have begun to influence other prices as well. Even excluding food and energy costs, inflation was up 0.3 percent for the month.

"For those who use the telephone or smoke, the news was pretty bad as well," said Joel Naroff, chief economist for Commerce Bancorp. "There were some places where consumer costs were under control. Health care, clothing and motor vehicle prices were tame, at least in June. But with consumer costs up five percent over the year it is little wonder that households are depressed."

In his testimony to Congress Tuesday, a downcast Fed Chairman Ben Bernanke noted that inflation risks to the economy had "intensified." But at the same time, the huge increase in gasoline prices has prompted consumers to cut spending, slamming the breaks on economic growth. Naroff says that, as a result, Bernanke and the Fed have little wiggle room.

"We have a stagnating economy with rising inflation. Clearly, the rate of inflation and the slowdown in economic growth is nothing near what we saw in the 1970s, but the combination of the two is creating real problems for the Federal Reserve," Naroff said.

With a slowing economy, the Fed might feel pressure to cut interest rates some more. But with rising inflation, they might feel pressure to actually raise rates. Naroff said they are likely to do neither.

"So monetary policy, out of necessity, is moving away from rate changes to liquidity and financial stability," he said. "But even in that arena, the Fed's ability is limited."

About all that's left for the Fed, Naroff says, is to hope that the housing market stabilizes and prices stop falling.