CNN's web site was in upbeat mood last Thursday. "Best-of-both-worlds continues in halcyon US economy" it trumpeted on news that America had grown at the robust annual rate of 4.2% in the first quarter, while inflation had dropped to its lowest level since 1964. Better still, employment costs rose by only 0.7% in the first quarter - and this is the indicator Alan Greenspan, the Federal Reserve chairman, is said to watch most closely in deciding whether to raise interest rates.

Consumers remain cheerful and in a buying mood. Spending rose at an annual rate of 5.7% in the first quarter, as confidence soared to almost its highest level in 30 years - and with reason. Everyone who wants to work has a job, and real incomes are rising. The stock market continues to rise, with slight interruptions, adding to the value of pensions, savings plans and brokerage accounts. Americans have accumulated so much wealth by merely watching shares rise that they have decided they can save less: in the 1980s Americans saved 7.2% of their disposable incomes; now, they put away only 3.8%.

The good news does not stop there. The strong dollar makes imported goods cheap, and low interest rates make it easy to finance homes and consumer durables. Sales of new homes in the first quarter were at their highest level in almost 20 years. Buyers are snapping up new houses so fast the stock of unsold new homes is at a historic low. And sales of older homes are also booming. Estate agents are saying buyers should be prepared to pay a premium over asking prices and be ready to write a deposit cheque on the spot with mortgage finance lined up.

In light of all of this, it may seem churlish to seek a cloud in this silver lining. But there is one: the danger of inflation, forcing the Fed to head it off by raising interest rates, producing a collapse in bonds and shares. A report that the Fed was getting more nervous about overheating caused shares to drop sharply last Monday, a decline from which they recovered only when the good news about inflation-free growth hit the wires later in the week.

Analysts say the inflation hawks on the Fed's monetary policy committee are trying, unsuccessfully so far, to persuade Greenspan to raise rates now. Though he fears he may be presiding over an asset bubble, he is reluctant to move until he can determine just how virulent the current Asian flu proves to be. If Japan's recession deepens, and Asia's tigers-turned-pussycats continue to resist adopting the structural reforms vital to recovery, the economy may cool without Fed action. Cheap Asian imports will keep prices down and free up American capacity, and declining exports will further ease strains on domestic capacity. The result, on this analysis, will be nil inflation, reduced profits growth, lower shares and an economy not threatened with overheating.

But inflation hawks say this is not likely. They fear a tightening labour market will sooner or later be reflected in higher wages and that productivity gains may not offset wage rises. They say there is a limit to how much of the expected labour-costs rise can be absorbed by companies, which will eventually have to pass on those costs to consumers. The Wall Street Journal says the Midwest, the old rust belt, "is having a hard time sustaining its recent pace of economic expansion" because businesses are running out of workers.

The Midwest is not the only area struggling to find workers, especially skilled workers. The national college graduate unemployment rate is down to less than 2%, and the high-school graduate number is 4%. This means employers increasingly have to hire workers who need costly training, and who have no experience of regular work. Such hiring may offset the rising productivity that has until now flowed from the big investment in plant, equipment and computers, and push up labour costs.

Byron Wien, the Morgan Stanley strategist, has other reasons for saying: "Investors are too complacent about inflation". For one thing, the anti-inflationary effect of the rising dollar may be over. With the trade deficit rising, the dollar's ability to rise further is limited. For another, the drop in oil prices may have run its course, at least for now. Then, too, there is the money supply. The broadest monetary growth measure is rising at a 12.3% annual rate. Wien says: "In the past, rapid monetary expansion in excess of productivity growth has been the precusor of inflation."

A final worry is that service-sector inflation is creeping up. Many service industries are immune from foreign competition. Rising healthcare costs will not drive Americans to use cheaper doctors in Mexico, rising restaurant bills will not drive Americans from mid-town Manhattan to downtown Managua, and hikes in the cost of haircuts and dry cleaning are not likely to cause consumers to look for barbers and cleaners in southeast Asia. If wages in such sectors begin to respond to labour shortages, firms may prove to have enough pricing power to pass on cost increases, setting off inflation.

"For investors," says Wien, "the question is whether we have enough warning signs indicating that inflation will pick up over the next six months." He clearly thinks the new paradigmists who say all is well in the "halcyon US economy" are in for an unpleasant surprise.