I have to laugh. Bernanke’s speech, which sparked yesterday’s market rally, talked about inflation “expectations” being the Fed’s focus, rather than actual inflation. With the CPI running now 4.2% year-over-year, the Fed really can’t deny that inflation is running hot. But Bernanke really doesn’t want to do what needs to be done, which is keep raising rates or even do a pre-emptive 50 basis points at the next meeting. No-one buys the “core inflation” story anymore, and besides it is not that great either. So what to do? Shift the sands, of course, to something fuzzier. Focus on inflation expectations. This is essentially the same as stock analysts do, when faced with putting lipstick on an incredibly overvalued pig - look to expectations - “selling at only 20 times 2010 estimated earnings” for example.

At any rate, the Michigan consumer confidence survey today showed lower inflation expectations. One-year ahead inflation expectations dropped from May’s 4.0% to 3.4%. And 10-year ahead inflation expectations dropped from May’s 3.2% to 3.0%. So I guess everything’s OK?

Actually it probably is, because the latest data shows real M2 declining for the third month in a row, and both real and nominal retail sales declining in May. Clearly the economy has begun the long slow roll down.