Surging oil prices are deepening a split inside the Federal Reserve, blurring the likely direction of monetary policy and probably making next week’s policy meeting all the more contentious, Reuters reported.

The sharp increase in energy costs, precipitated by a wave of pro-democracy uprisings across the Arab world, could affect the economy in different ways, by retarding growth, boosting inflation or, in the worst case, both.

This complicates the terrain for policymakers, hardening long-held positions ahead of the Fed’s March 15 gathering.

“The meeting has definitely gotten more interesting for the participants than they’d like,” said Mitch Stapley, chief fixed-income officer at Fifth Third Asset Management. “The stakes are rising,” he said. “The nightmare scenario is some kind of stagflation outcome. That’s some ways down the road, but you begin to see that discussion emerge.”

At the heart of the debate is the concept of economic slack, an attempt to measure the gap between current levels of activity and the economy’s full potential.

The core of the policy-setting Federal Open Market Committee, led by Chairman Ben Bernanke, firmly believes broad price pressures are highly unlikely to overtake an economy plagued by high unemployment and meager wage gains.

A vocal minority of inflation hawks, however, are skeptical that the so-called output gap is a good determinant of U.S. inflation. If the monetary authorities wait for the country’s 8.9 percent jobless rate to fall to more desirable levels, they say, it will already be too late.

At this point, most analysts see the Fed completing its current $600 billion bond purchase program and calling it a day, even if the situation in the Middle East has widened the range of possible outcomes.