Ben Bernanke and "inflation expectations"

The U.S. dollar is strengthening after a sort of shock-and-awe campaign by the U.S. government yesterday - as he left for Europe, President Bush called for a stronger dollar in the wake of soaring energy prices, then Treasury Secretary Paulson said in an interview with CNBC that he would "never" rule out currency intervention, and New York Fed President Tim Geithner said the central bank is "watching" the dollar.

All of this concern over the international value of the dollar is a result of, well, the declining international value of the dollar.

Contrary to the long-held popular belief amongst Federal Reserve economists, the declining international value of the dollar is now thought to be somehow related to rising prices in the U.S.

Hmmm...

But, yesterday's most important "dollar talk" came from Fed Chairman Ben Bernanke himself. In a speech about analyzing inflation, he provided the weightiest words on the subject, going so far as to say that the central bank will "strongly resist" any rise in inflation expectations.

Those wearing Fed decoder rings have translated this to mean, "if prices don't stop rising, we will begin threatening not to lower interest rates four times a week instead of twice a week, and if that doesn't work, we'll start threatening not to lower interest rates daily".

Here's the excerpt from the speech:

Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and future developments in this regard will bear close attention. Moreover, the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.

Let's see, over the last year or so, one-year inflation expectations from the Reuters/University of Michigan Consumer Sentiment survey have risen from about 3.0 percent to the current 5.2 percent, an increase of over 70 percent.

During the same period, the Conference Board's Consumer Confidence Survey shows one-year inflation expectations rising from 4.6 percent to 7.7 percent, an increase of just under 70 percent.

This isn't an "erosion" or an "unanchoring"?