Finally! Chairman Bernanke has woken up from a deep inflation coma.  On more than one recent occasion, Helicopter Ben as acknowledged an elevated level of inflation and expectations.  No surprise, of course, that the Chairman has come around of late.  With Tuesday evening's comments that the economy has skirted a disaster, the focus turns to inflation which has been ignored for months.  That was part of the plan, right?  Get the economy in order, supply enough liquidity, lower rates to help the banks and then attack inflation before it runs amock. 

 

 

Some notes from the Bernanke speech on Tuesday tell us much about what the Chairman is thinking, and in all likelihood gave us a hint to what inflation numbers will be.  Friday gives us the CPI number, and if last Friday's market reaction to news is any indication, well... a bad number is certain to cause some fear to permeate.  From Bernanke's speech Tuesday:

 

Late last week, some Fed Governors also started to sound the warning sign.  Is it just jawboning or a true policy shift?  The economy may actually be safe and is skirting a recession, but the jobs data tosses in a wildcard.  Will inflationary pressure be too much to withstand for the Fed to stand pat on rates? 

 

Certainly a 'one and done' rate hike is not an option - when they move rates, it's in a series of moves.  I believe that the risk of higher rates comes only with strong economic growth, say something on the order of 3.5-4% GDP. 

 

Another wildcard is productivity... outstanding numbers produced in the last quarter.  Why is this a wild card?  The economy can grow non-inflationary with higher productivity.  This may be the only savior against the Fed raising rates to fend off inflation.