IT'S NOT JUST Iraq and oil that are pushing up the American inflation rate. They account for much of the dismayingly high Producer Price Index that the government reported on Friday -- but by no means all. Even with energy taken out of them, the numbers were much too high for comfort. Foodstuffs suddenly got more expensive last month, and that had nothing to do with the Middle East.

The odds are now rising that the country is going into a recession. One standard remedy is to loosen monetary policy and bring interest rates down. But in the present circumstances the Federal Reserve Board can't afford to do much of that. If it begins to move aggressively in that direction, investors will immediately take it to be a signal that the government is prepared to tolerate much higher inflation. They will respond by bidding interest rates up, not down, to protect themselves from the depreciation of their dollars.

There's another constraint as well on the Federal Reserve. While interest rates here look high to Americans, they are among the lowest in the world. Both the Japanese and the Germans have been raising theirs to rein in rapid expansion. Investment money tends to follow the high rates and as it leaves the United States, the dollar's exchange rate drops. The dollar has fallen more than enough in recent weeks, for a low dollar aggravates inflation by making imports cost more.

American policy is trapped in a familiar state of paralysis, and it can't be blamed on Saddam Hussein. The fault lies with the anti-tax populism of the 1980s, and with the politicians -- led by the last president and the present one -- who encouraged it. After having been on a plateau for several years, the federal budget deficit is rising again, rapidly, and next year's will be tremendous.

Half a dozen years ago, when the economy was growing strongly and inflation was lower, strategists began to warn the Reagan administration that it was time to begin getting deficits and interest rates back down. Neither that administration nor, until this year, its successor paid any attention. They squandered their opportunities when it would have been easy, relatively painless and safe to regain control of deficits and inflation. Now President Bush and the congressional leadership are condemned to struggle with them in an increasingly bleak and unpromising atmosphere.