The latest news on the economy shows that the Federal Reserve is still struggling with how to handle the demands posed by a weak economy. Rising consumer prices, a soft dollar, the “housing crisis”, higher gas prices (now over $100 a barrel!), and new worries over inflation are dominating business headlines this week.

The question is, what can the government do at this point? After having made several significant rate cuts in recent weeks, further rate cuts are not likely, and may even pose more of a threat than a boost if they did happen.

From today’s Chicago Tribune:

Consumer prices accelerated their upward trend last month, the Bureau of Labor Statistics said Wednesday, in a report that suggests higher petroleum costs are beginning to infiltrate into the broader economy.

The latest evidence of intensifying inflationary pressures means the Federal Reserve, which has been focused almost completely on stimulating the slowing economy to prevent recession, “needs to stop ignoring inflation,” said First Trust Advisors economist Brian Wesbury.

“With high inflation and slow growth,” said Danske Bank analyst Peter Possing Andersen, “the Fed is caught between a rock and a hard place.”

The New York Times has a similar analysis:

Consumer prices rose more than expected last month, the government reported on Wednesday, reinforcing concerns at the Federal Reserve that inflation still poses a threat to the American economy.

The rise in the Consumer Price Index may make life more difficult for the Fed as the central bank considers a new round of interest rate cuts aimed at preventing a recession. Rising oil prices, the cheaper dollar and the coming stimulus package could all potentially lead to increased price pressures this year, economists said.

Lower interest rates help stimulate economic activity but can also cause prices to rise. Fed officials have indicated they are focused on dealing with risks to growth, but minutes of their most recent meeting revealed concerns about a potential rise in inflation over the next few months.

One Fed official, Richard W. Fisher of the Federal Reserve Bank of Dallas, dissented from the Fed’s decision to lower rates by a half-point, arguing that he viewed “upside risks to inflation as being greater than the downside risks to longer-term economic growth,” according to the minutes.

Those concerns were reinforced by the most recent reading on the Consumer Price Index, which rose 0.4 percent in January, a bigger gain than economists had predicted.

What does this all mean to the average small business? It’s hard to say, and it depends largely on what kind of business you’re running. But rising consumer prices are rarely a good thing for the business community; anything that stifles consumer spending tends to hit small businesses harder than bigger companies.

What do you think? Are any of these developments directly affecting your online business? Do you welcome another rate cut, or think there’s been too many lately? Do you think the government is taking all this seriously enough? Feel free to sound off in the comments and let us know how your business is reacting to these economic difficulties.