Monday's announcement of a jump in the annual rate of inflation to an 18-year high of 5.3 percent in April should send shudders through the community.

There is no question that it has been primarily caused by a dramatic increase in the price of oil in the last year. Because oil has continued to rise since April, inflation will continue to rise through the next few months as well.

And it does not take much thought to see that a rise in fuel prices affects almost all other sectors of the economy as well, from food to clothing to health care.

Fuel surcharges on imports drive up the cost of all almost all goods sold in Bermuda, while any business or service that uses transport or electricity will have to either absorb the costs or pass them onto the consumer.

None of this is surprising and it will not end soon. At the same time, Bermuda's own economy continues to generate its own inflation, although there are now some signs that the building boom is slowing.

Some months ago, this newspaper was concerned about an overheating economy and called for Government to use what powers it had to control growth.

Now, with the US economy still in the doldrums and local tourism showing signs of weakness, the Island may be faced with the more difficult problem of stagflation – slowing or no economic growth coupled with soaring inflation.

This may be overstating the case. The last time stagflation was seen was in the 1970s when, in real terms, the surge in oil prices was much more intense and double digit inflation was the norm. Bermuda and the world are a long way from that. But that does not mean that the Island is not facing difficult problems.

These are exacerbated by the fact that there is little the Island can do about oil prices, or indeed basic food prices, which have soared in recent months as well.

But there are steps that can be taken to offset these developments. One is for Government to tighten its own spending, thus reducing money supply. Another, in the absence of a central bank with the power to set interest rates, is to convince the banks to watch their lending policies carefully.

The latter point is difficult, because of the need to encourage growth while controlling inflation. The problem is that Bermuda is paying the price for loose lending practices in the past.

Bermudian residents can also practise restraint, as Finance Minister Paula Cox urged in yesterday's newspaper. Driving less, using public transport (and she promised it would be free by the end of the year), reducing electricity use (turn that air conditioner off when you're not in the room) and a host of other budgetary actions can be taken to cut household spending. But that may not be enough. For people who live from one pay cheque to the next, it's hard to cut fat that isn't there.

Assuming that inflation does not slow down, the next big challenge will come when new wage agreements come up for negotiation. On the one hand, people need to eat, pay rent, pay for electricity and gas and so on. But wage increases also drive the inflation spiral, meaning that today's wage increase could lead to another inflationary spike tomorrow as the increased cost of labour is added to prices. This, of course, is followed by another wage increase.

To be sure, this is simplistic, but what is clear is that it is easier to get into this spiral than it is to get out of it.