ORLANDO, Florida, June 15 (Reuters) - The jump in short-dated UK bond yields this week to a 15-year high, amid indicators pointing to hot wage growth but sluggish economic activity, has revived fears of an old British bogeyman: stagflation.

Half a century may have passed since the 1970s but the ghosts of stagflation linger, and although a return to double-digit inflation and prolonged economic contraction is highly unlikely, policymakers in Britain face huge challenges.

Inflation is the highest in the Group of Seven (G7) club of advanced economies and more than four times higher than the Bank of England's (BoE) target. Nominal wage growth is the strongest in two years, economic growth is weak, and these stagflationary pressures are being sustained by persistently low productivity.

It is an uncomfortable place for the BoE to be in, and bond traders know it.

The two-year gilt yield this week spiked to a 15-year high of 4.91%, going beyond last September's peak hit during the market meltdown triggered by the "Trussonomics" agenda of former Prime Minister Liz Truss.

This lifted the two-year yield some 43 basis points (bps) above the 10-year yield, the most inverted yield curve since 2008. An inverted yield curve is not as reliable an indicator of recession in Britain as it is in the U.S., but it is a warning, and clearly not a good sign for banks, some of whom are already pulling mortgage products.

The longer end of the UK yield curve is feeling the squeeze too, with the UK-German 10-year yield spread widening above 200 bps. Excluding the Trussonomics-driven turmoil of last year, that is the widest spread since the BoE's independence in 1997.

REAL WAGES AND THE NAPOLEONIC WARS

Recent synchronized global tightening cycles show that major central banks tend not to raise rates higher than the Federal Reserve. But traders are now pricing in a peak BoE terminal rate of 5.75% early next year, above the implied Fed peak of around 5.375% later this year.

That's another 125 bps of rate hikes on top of the 440 bps of tightening already delivered in the last 18 months. Deutsche Bank analysts note that even after all those rate hikes, the BoE is still "just as far away from its landing zone as it was late last year."

Sterling may be enjoying the ride for now, forging 14-month highs against the dollar and on a trade-weighted basis, but stagflationary pressures are rarely positive for a currency in the long term. Especially in countries with huge current account and budget deficits.

Inflation in Britain is cooling but at 8.7% is still hotter than all other G7 countries, and more than double the rates in Canada, Japan and the United States. If the International Monetary Fund is right, Britain will be the only G7 economy to contract this year, and still languish at the lower end of the G7 growth table next year.

The specter of stagflation was brought into sharper focus this week by the latest wage data.

Annual average earnings in the three months to April rose to 7.2%, the highest in two years and close to the highest in decades, while creating a quarter of a million jobs.

Yet real average weekly earnings are the same as they were in November 2005, a completely unprecedented period of no earnings growth that Paul Johnson of the Institute for Fiscal Studies estimates has probably not been seen since the early 19th century Napoleonic wars.

The economy expanded just 0.1% in the three months to April. As economists at HSBC put it, "a lot of jobs for not a lot of growth," which confirms that rising pay is clearly not productivity driven. "More bad news for unit labour costs and hence inflation prospects," they wrote on Wednesday.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Jamie Freed)