NEW YORK (CNN/Money) - There's been much worry about inflation lately, but not all inflation signals are pointing in the same direction, making the high-stakes job for Alan Greenspan and Co. all the more tricky.

The good news Some recent indicators have shown tame inflation Indicator  What it did  Commerce's core PCE index  +1.4% in the past year  U. Michigan's 5-year inflation outlook  Steady in May  Labor Department's wage/salary measure  +2.5% year over year in 1Q, lowest on record   Source:  Bureau of Economic Analysis, University of Michigan, Bureau of Labor Statistics

If inflation is fairly toothless, as most Federal Reserve policy-makers and most other economists believe, then the central bank's go-slow approach to raising interest rates will work out just fine.

But if those red lights flashing 'inflation' on the economy's dashboard are to be believed, the Fed might be in for a rougher ride than it thinks.

The latter risk led Greenspan to warn on Tuesday that, while the Fed's best-laid plans were to raise rates gradually, the central bank could jack up rates more aggressively, if need be.

First, the good news.

Recently, the Commerce Department said its monthly inflation gauge based on consumer spending, the personal consumption expenditure (PCE) price index, rose 1.4 percent in the past year excluding volatile food and energy prices -- the fastest pace in a year-and-a-half but still relatively tame.

Fed policy-makers pay close attention to this number and are happy to see it hold between 1 and 2 percent, many economists said.

Analysts widely expect the Fed to raise its target for the federal funds rate when the central bank's policy-makers meet June 29-30, but only by a quarter-percentage point, in the belief that inflation is fairly mild. The Fed has held the fed funds rate, a key overnight bank lending rate, at 1 percent -- the lowest level in more than 40 years -- for nearly a year.

"For every pricing power story the Fed hawks and bond bears can find, we can probably match in the opposite direction," Merrill Lynch chief economist David Rosenberg said in a note to clients Wednesday.

Is Federal Reserve Chairman Alan Greenspan ready to start raising interest rates more aggressively? CNNfn's Kathleen Hays examines his comments. Play video (Real or Windows Media)

Tame inflation and slowly rising interest rates would be welcome news for many investors. After being punished earlier this year by worries about how aggressively the Fed would raise short-term rates, recent signs of stable prices have helped stocks and bonds recoup some ground.

Meanwhile, long-term inflation expectations are holding steady, according to recent consumer surveys. Inflation expectations can be a self-fulfilling prophecy -- if consumers think prices will keep rising, they'll be more willing to pay higher prices, which could encourage businesses to jack prices up further.

"Stable long-term expectations are a potent headwind against a sharp acceleration in underlying price trends," Citigroup chief economist Robert DiClemente wrote in a recent note.

DiClemente also noted that recent job gains haven't totally erased all the jobs lost during the last recession, and that unemployment is still higher than it should be, all of which keeps a lid on wage and salary growth. Since labor costs drive about two-thirds of total inflation pressures, such "slack" in the labor market means inflation isn't yet roiling.

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In addition, if employers keep using technology to wring more work out of workers, as they have been in recent years -- the so-called productivity miracle -- then inflation may never get to a full boil. The economy was booming in the late 1990s, for example, with hundreds of thousands of new workers added every month, and yet inflation stayed tame.

"Labor input costs ... will eventually start to show some upward pressure, but I don't think it's going to be egregious," said David Resler, chief economist at Nomura Securities. "Part of that is productivity, and part of it is that we're in a market that is highly competitive and globalized, limiting the ability of anybody to pass on higher wage costs."

Now the bad news: The core consumer price index (CPI), which strips out volatile food and energy costs, rose 1.8 percent in the year ending in April, according to the latest reading from the Bureau of Labor Statistics.

The bad news But other indicators have shown a recent surge in inflation Indicator  What it did  Core CPI  +3.3% annualized in Feb.-April  ISM prices paid, supplier deliveries indices  At or near 25-year highs in May  Commerce's wage/salary measure  +4.2% year over year in 1Q, more than double the year-ago rate   Source:  Bureau of Labor Statistics, ISM, Bureau of Economic Analysis

That was the highest core CPI reading since January 2003, and some details were worrisome: The price gains from February to April, if stretched across 12 months, would be 3.3 percent, a rate not seen since 1993.

And that benign PCE index may not be so benign, according to Morgan Stanley chief U.S. economist Richard Berner. In a note posted to the firm's Web site recently, Berner noted that the PCE includes some government guesses about prices that aren't listed anywhere, such as what your bank charges you for printing up monthly statements.

Stripping out these prices, Berner found, and the core PCE index has surged at a 2.3 percent annual rate in the past four months, outside the Fed's safety zone.

"Upside inflation risks may require that the Fed move promptly and perhaps a little more forcefully to ensure that inflation and inflation expectations stay low," Berner wrote.

A recent manufacturing report from the Institute for Supply Management contained some May inflation numbers that were more obviously alarming. The purchasing managers' index of "prices paid" stayed close to April's 25-year high. Its "supplier deliveries" index, a measure of supply bottlenecks, jumped to a 25-year high.

"Welcome to the supply shock," said Russell Sheldon, senior economist at BMO Nesbitt Burns. "The economy has outgrown last year's conservative expectations by a mile, generating shortages and widespread price hikes that are large and will have to be passed on to consumers."

In the view of Sheldon and some like-minded "inflation hawks," the Fed's current 1 percent fed funds target is far too low, risking much higher inflation in the near future. The Fed lower its fed funds target to stimulate the economy and raises it to slow things down in a bid to ward off inflation.

Some economists believe the Fed could raise the fed funds rate to 4 percent and still have a neutral policy. The longer it waits, some economists fear, the more likely that rate hikes will come quickly.

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"The Fed has indicated it wants to start out slow, and it probably will," Joel Naroff, president and chief economist at Naroff Economic Advisors, said recently. "But these pressures, as they build, will force the Fed to do at least one [half-percentage-point] move by the end of the year."

Of course, there's also the worry that, if the Fed moves too far too soon, it could tip the economy in the other direction, hurting all those consumers who took on so much debt in the days of low rates.

Back we'd fall, then, into the waiting arms of the deflation monster that had everybody so worked up last year.

"Inflation and deflation in this levered world coexist nearly side-by-side," bond guru Bill Gross, managing director of PIMCO, wrote in a recent note to clients.

"Is it any wonder that in the space of the last six months we have had headline speeches promoting the dangers of deflation only to be followed by fears of accelerating inflation?"

-- This is an updated version of a story that first ran on June 1, 2004.