It's not really possible to assign a single cause to last Friday's selloff, but the stench of an old beast that most investors had thought long dead certainly had something to do with it.

The strength of the March

Consumer Price Index

, the nation's key inflation report, caught everybody by surprise. Economists polled by

Reuters

had expected it to gain 0.5% for the month and it grew by 0.7%, sending it 3.7% above the year-ago level. Even more worrisome was a 0.4% gain -- double the consensus forecast -- in the so-called core rate. Because the core excludes the food and energy sectors, there was no laying this one on high oil prices. For the stock market in particular, it was a scary report.

"Far and away, the most destructive thing to such a richly valued equity market would be an inflation problem," explains Jeff Applegate, chief investment strategist at

Lehman Brothers

. "Look at what happened in the '70s when inflation went up -- P/Es collapsed; quality of earnings collapsed; interest rates went up. It has a lot of vicious implications."

There is, thankfully, a lot of distance to travel between one bad CPI report and the kind of inflation the U.S. saw back then, when two oil crises swept across the economy and central bank policy was just plain awful. Still, economists are warning that the best inflation news, the low-2% or so of the last couple years, is probably over.

"I'm reluctant to get sucked into this 'Here it is. Run! Run!'" said Bill Dudley, director of U.S. economic research at

Goldman Sachs

. "Our view is that the March CPI report probably overstates the degree of inflationary pressure, but probably does say that the very best news is past."

To varying degrees, most economists seem to agree with that assessment. The main bone of contention now being exactly how heavy inflationary pressures are and how much the

Federal Reserve

will need to hike rates to keep inflation at bay.

"Inflation has turned; it's not a one-month blip," says

Morgan Stanley Dean Witter

chief economist Steve Roach (an inflation hawk, if there ever was one). "It's seven months in a row of acceleration in the core CPI. The risk is that we will continue to go higher unless the Fed does something to slow the economy down."

Others do not agree. Roach's colleague at Morgan Stanley, U.S. equity strategist Peter Canelo (an economist by training), for example, thinks that the productivity gains the U.S. has enjoyed from new technologies have been enough to significantly raise the sustainable growth rate of the economy, keeping inflation at bay.

The productivity argument is a thorny one, though. True, productivity has surged to phenomenal levels -- it gained 6.4% in the fourth quarter, 5% in the third quarter. But some worry that that's about as good as it's going to get, that in fact productivity is about to come down. The notion here is that productivity has both a secular trend and a cyclical one. The secular trend is long lasting, and there is no doubt that U.S. productivity has risen. The cyclical trend is, well, cyclical. After two or three good quarters, it tends to move on down.

"At some point the cyclical element of productivity overcomes the secular element, and it slows down a little bit," says

Salomon Smith Barney

economist Mitchell Held. Slowing productivity basically means that companies are getting less for their labor dollar. This puts pressure on them to raise prices. And rising prices? Well, that's inflation.

Yet not everybody quite agrees with that, either.

Chase Securities

senior U.S. economist Jim Glassman argues that businesses are just as able to see the cyclical nature of productivity swings as are economists. "Everybody, businesses included, when they get these bursts in productivity that are far above normal, they pocket it," he says. "They don't think it's sustainable."

Confused about what's really happening here? All this bickering back and forth is pretty much a good sign -- it shows that while the potential for truly damaging inflation may have risen, the rough beast hasn't really begun slouching toward the economy yet. This is still an argument over how much the Fed needs to raise rates, with New-Era economists like Glassman reckoning not much, and hawks like Roach figuring there's a lot of work to do.

The Fed itself, worried about tight labor markets and a booming economy, seems disposed to hiking rates more. Friday's strong inflation report gives them an excuse to do just that.

"It's probably important as a crutch for the Fed as anything else -- a smoking gun they can point to," says Dudley.