All Clear on the Bernanke Front

On the flip side, Bernanke wants us all to realize what he's talking about, says Zoltan Pozsar, an economist at Economy.com. Bernanke is a proponent of having a targeted inflation rate as part of Fed policy, and he's going to come right out and explicitly tell us his goal. And whether he uses the consumer price index or the personal consumption expenditures index to reach that target, it doesn't matter.

"He's open to what the economy is telling him," says Chris Burdick, director, economic analysis, at the Charles Schwab Center for Investment Research. "He proposes risk management and will respond accordingly."

Bernanke has made it very clear that over next three to four years he's aiming to keep inflation at an average of 2%. There, now you know.

But more importantly, Bernanke wants to manage inflation expectations. Because, let's face it, if the media start screaming, "Inflation is coming! Inflation is coming!" we're going to panic -- even if we don't truly understand what that means. It just sounds bad.

So we're going to react, even if the fundamentals tell us we're wrong. So that might mean a slowdown in purchasing, or even an increase in savings. Either way, it translates into a decrease in the money supply, and that's not a good scenario either. So Bernanke wants to bring in the general public as partner in this quest and help us understand, says Pozsar.

But he has his work cut out for him, because inflation is a tricky subject. Here's a quick primer. Back in the day, inflation used to refer to a rise in the money supply, which generally led to a general increase in prices, mainly because consumers had more money to spend. However, over time, the definition of inflation has cut to the chase and come to mean the actual rise in prices itself. So now when people mention inflation, they're referring to the increase in the general level of prices.