Inflation may not be at the forefront of worries about economy for now, but it’s certainly in the back of many investors’ minds. Not that anyone thinks price increases will be reinforced by the labor market, as per the old “wage-push” theory. A new report from the International Labor Organization showed that wage growth continued to decline around the world in 2008, falling to 1.4 percent last year from 4.3 percent in 2007. The UN group also suggested things have gotten worse this year.

The picture on wages is likely to get worse in 2009 – despite the beginning of a possible economic recovery.   Compared to the annual average of 2008, the real wages in the first quarter of 2009 fell in more than half of the 35 countries for which recent data is available.   The downward trend in wages raises some questions about the extent to which the consumption of workers and their families will be able to sustain aggregate demand for economic production once the effects of government rescue packages peter out.

This trend has not, however, succeeded in calming those spooked by unprecedented monetary and fiscal stimulus from governments and central banks around the world. Indeed, inflation-hedging is creating market niches all of its own. The Treasury, for instance, is expected to bring back 30-year Treasury Inflation Protected Securities, or TIPS, as part of its quarterly refunding announcement on Wednesday. Gorge Goncalves at Cantor Fitzgerald notes:

The Treasury could expand its TIPS offerings and or bring back the 30-Year TIPS to help finance the federal debt needs.  In the latest dealer questionnaire the Treasury asked about potential changes to the TIPS program including the replacement of the 20-year TIPS with a new 30-year TIPS security. 

Bond giant PIMCO, in the meantime, has introduced its own new anti-inflation fund, which it says is composed of a mix of TIPS and municipal bonds. John Cummings, who will manage the fund, offers some insight into the reasoning behind its creation.

With growing U.S. deficit projections and continued economic uncertainty, investors are facing the potential for higher taxes, elevated financial risks and the need to protect the purchasing power of their investments against inflation over time. 

BofA Merrill Lynch Global Research economist Ethan Harris thinks all the talk of a Federal Reserve rate hike is just that — talk. Harris, a former Federal Reserve Bank of New York economist, said much of the recent hawkish commentary has come from presidents of the regional Fed banks, and that may not be indicative of the thinking on the Fed’s board.

“The signals don’t  come from Reserve Bank Presidents or advisers,” Harris wrote in a note to clients. “They come from either the overall committee — in the form of the official statements — or from the core of the committee — that means (Chairman Ben) Bernanke, (Vice Chairman Donald) Kohn, and to a lesser extend, New York President (William) Dudley.”

The Fed starts its two-day policy-setting meeting on Tuesday, and Harris is certainly not alone in thinking they’ll stay the course, keeping benchmark interest rates near zero. In fact, BofA Merrill thinks it will be the European Central Bank that hikes before the Fed.

“The bottom line is that faced with roughly the same economic backdrop — very low core inflation, moderate headline inflation and a large but slowly closing output gap — we expect the ECB to be more hawkish than the Fed,” they wrote. “We expect a replay of the summer of 2008, when the ECB hiked in response to high headline inflation, but Bernanke held back the Fed for fear of fragile financial conditions. Of course, thankfully, a replay of the fall of 2008 is unlikely.”

U.S. Representative Barney Frank forgot one minor little detail in Thursday’s hearing on overhauling the financial regulatory system — the witness, Federal Reserve Chairman Ben Bernanke.

After Frank and other members of Congress delivered opening statements, Frank launched into a spirited rebuttal of one member’s comments, but was soon interrupted by the committee’s top-ranking Republican, Spencer Bachus.

Bachus: Mr. Chairman, uh, your time has expired. Now if you want to give an additional….

Frank: Excuse me, I’m in my five questions, I’m in my five minutes.

Bachus: How about the opening statement of Chairman Bernanke?

Frank: Oh, I forgot about that. I apologize.

After Bernanke read his statement, Frank offered another apology — and docked himself 30 seconds of speaking time.

Congratulations, Ben Bernanke. It looks like a second term as Federal Reserve chairman is in your future. But considering the tasks before him, is this a blessing or a curse?

Greg Mankiw, the Harvard University economics professor and former adviser to President George W. Bush, summed it up nicely on his blog:

“I extend my congratulations to the President for a fine decision and my condolences to Ben for having the spend the next four years overworked and underpaid.”

So what do you think? Best job in the world? Or worst?

Two days after arriving in Martha's Vineyard, President Barack Obama is taking a break from his vacation to make some news: he will announce that he is nominating Ben Bernanke to a second term as chairman of the Federal Reserve.

Investors have given Bernanke, whose current term expires on Jan. 31, 2010, high marks and had widely expected his reappointment.

But the announcement is being made earlier than expected and comes not just during Obama's family vacation but also on the day that the White House Office of Management and Budget and the non-partisan Congressional Budget Office both release their midyear budget updates.

The reports are expected to show the government will spend a record $1.6 trillion more than it collects this year and nearly double its outstanding debt over the next 10 years.

The grim fiscal picture could provide fodder for opponents of Obama's costly plan to overhaul the healthcare system.

So why is Obama interrupting his vacation to announce Bernanke's renomination? Does he hope to inject a sense of continuity and stability by erasing doubt over who might lead the Fed?

For more Reuters political news, click here.

Photo credit: REUTERS/Jason Reed (Obama and friend Eric Whitaker wave as they golf on Martha's Vineyard)

Professor Charles Goodhart of the London School of Economics explains the difference between inflation targeting and price level targeting in the lobby of Jackson Lake Lodge after taking part in an animated discussion of whether central banks should target price levels rather than inflation.

A paper University of California, Santa Cruz economist Carl Walsh presented at the Federal Reserve’s annual mountain retreat suggested that one lesson from the recent financial crisis is that central banks would benefit from the greater flexibility that price level targeting might give them.

A former Fed governor,  Frederic Mishkin, said that while in theory price level targeting may sound attractive, in actual practice it is more difficult to use effectively. One difficulty he cited was in explaining to consumers how it works. 

 Juergen Stark of the inflation-targeting European Central Bank, said that inflation targeting was working well for the ECB, and that changing tactics in a crisis would be inappropriate.

 Bernanke’s tone may have been slightly more optimistic today — but the first thing policy-makers from around the world see as they enter the conference room for the Fed’s annual Jackson Hole symposium is a large stuffed bear.

Bernanke told the conference on Friday morning that the prospects for return to global growth appear “good” in the near-term — his clearest signal yet that he thinks the global recovery is at hand.

The ECB’s Trichet, on the other hand, expressed uneasiness at what he saw as premature talk of a return to normal from a financial crisis.

After two years of battling a financial crisis and a deep recession, Federal Reserve officials were able to poke fun at themselves at their annual retreat in Jackson Hole, Wyoming.

Many more people than there are places for want to attend the conference, which draws a number of central banking stars and takes place in a beautiful and remote national park. Kansas City Fed President Thomas Hoening, who hosts the event, said at the opening dinner on Thursday it’s been suggested to him that he open it to more participants.

“But then we’d be too big to feed,” he deadpanned. 

Fed Chairman Ben Bernanke promised at the event two years ago that the central bank would not protect investors from bad decisions, only to later throw emergency lifelines to firms whose collapse might cause widespread damage, making them “too big to fail.”

Bernanke, who has taken heat for underestimating the contagion that defaulting subprime mortgages would cause, picked up the theme.

He was glad, he told the dinner audience, that an evening of star-gazing led by local astronomers is on the schedule after a day of papers and discussions on Friday.

“But,” he asked Hoenig with a plaintive shrug, “Couldn’t you have invited some astrologers? I mean, could it have hurt?”

Five things to think about this week:

APPETITE TO CHASE? 
- Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally's momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles. The symmetry/asymmetry of market reaction to data this week -- as much from China as from the major developed economies -- will show how much appetite there is to keep chasing the rally higher. 

TAKING CONSUMERS' PULSE 
- A better picture of the health of the consumer will emerge this week as U.S. retailers' earnings coincides with the release of U.S. July retail sales data and the UK BRC retail survey comes out on the other side of the Atlantic. With joblessness still rising, the reports will show how willing households are to spend and whether deep discounts, which eat into retailers' profit margins, are the only thing that will tempt them to shop -- both key issues for the macroeconomic and corporate outlook. 

CENTRAL BANK WATCH 
- After last week's Bank of England surprise, all eyes turn to what sort of signals the U.S. Federal Reserve and Bank of Japan will send on the outlook for their respective economies and QE programmes. After the BOE's expansion of its QE programme the short sterling strip repriced how soon UK rates would rise. But the broader trend recently in the U.S., euro zone and the UK has been to discount rate rises in 2010 -- and possibly as soon as this year in Australia. Benchmark interbank euro rates have risen for the first time in two months, and central bankers everywhere, including China, face the delicate balancing act of managing monetary tightening expectations in the months ahead. 

PRICE PROTECTION
-This week's inflation data (from Germany, France, Italy, euro zone, U.S.) is unlikely to contain any nasty surprises. But the U.S. Treasury's willingness to consider bringing back the 30-year TIPS suggests that enough investors and reserve managers are looking beyond current subdued price data to future inflation risks from QE programmes, etc. That will ensure a close eye is kept on breakevens and whether the main issuers of inflation-linked products in the euro zone are inclined to increase issuance of such products.

TRADE 
- Official resistance to currency appreciation has been evident in some developed countries (Switzerland, RBA, RBNZ, among others) and there are suspicions that some Asian central banks may also be inclined to check such trends given the fierce competition among the world's exporters to grab what orders there are. Trade data this week will show how trade flows are faringand the extent to which Chinese economic activity is driving them.

Five things to think about this week: 

RESULTS RUSH 
- The early wave of Q2 earnings last week prevented any major risk shakeout but there are plenty more results this week, including from banking, technology (Apple, Microsoft), and other sectors (Lockheed Martin, Coke, McDonalds). Investors with bullish inclinations will be looking for the VIX to stay subdued after it fell last week to lows last seen in September 2008, especially if more pent up cash is to be released from money market funds. Bears will be thinking that what might be the S&P's best weekly performance since mid-March could be setting the market up to be more sensitive to bad news.

BANKS - IS THE BEST PAST? 
-  It is hard to see how bank results this week can top the boost which Goldman and JPM gave stocks last week. More of a mixed bag is likely with the U.S. slate including Bank of New York Mellon, Morgan Stanley, Wells Fargo, Capital One, and American Express while Credit Suisse will be the first major European bank to report. Defaults and delinquencies will be in focus for banks more exposed to the retail sector -- both for what it means for their outlook and for what it bodes for household solvency and spending. 

DRILLING DOWN 
-  The breakdown of company results this week (ABB, Texas Instruments, Caterpillar, DuPont, Boeing, 3M) will show the extent to which the inventory rebuilding story, which has helped lift world equities almost 40 percent from their March lows, can offer more sustainable support to stocks in the weeks and months ahead. Earnings this week will be closely scanned to see how inventories are stacking up verus orders. How deeply firms are cutting into costs to defend profit margins, as well as their business investment plans, will be key for unemployment and other macroeconomic data.

FLASH IN THE PAN? 
- Flash PMIs will show whether the positive surprise of the German orders and output data was a flash in the pan for the euro zone, and whether Chinese growth is generating orders in key euro zone countries. British Q2 GDP -- the first out of any G7 country -- will show the relative strengths and weaknesses of domestic demand, exports and inventory components and it will be particularly interesting in the UK's case to see just how supportive sterling's past slide has proved for net trade. 

QE STEER 
-  Minutes from the Bank of England's last policy meeting and congressional testimony from Federal Reserve Chairman Ben Bernanke should give a clearer steer on where quantitative easing programmes are heading. Key questions investors want answered are why the BoE deferred making a firm decision on whether to extend QE beyond August, and whether the Fed will increase its bond purchases. Government bond markets will be particularly sensitive and signs that central bank appetite for buying government debt is cooling -- perhaps because of concern over long-term inflation -- could trigger heavy selling, particularly in an climate of strong U.S. bank earnings and rebounding equities.