Bernanke's French Lesson

The economic news continues to be dreary, as stocks sink and job losses continued for the sixth straight month in June. But there was a glimmer of good news this week: The European Central Bank raised its key interest rate a quarter point to 4.25%.

We say good news because this means at least some central bankers are still worried enough about inflation to act against it. However, it is only a glimmer because ECB President Jean-Claude Trichet hinted in his announcement that the move did not necessarily mean more tightening would follow. He expressed this caution despite this week's report that euro-zone prices rose 4% in June – a 16-year high.

The strength of the euro against the pathetic dollar has tended to disguise the fact that Europe also has an inflation problem. The euro has also lost ground against gold and other commodities, and the European Commission's consumer survey shows a rise in inflation expectations. Monthly labor costs rose 3.3% in the first quarter, up from 2.9% in late 2007.

Mr. Trichet's tightening puts added pressure on the Federal Reserve to defend the dollar, which weakened further in anticipation of the ECB's move. Oil prices rose once again amid this dollar weakness, continuing to test the credibility of Fed Chairman Ben Bernanke. On Thursday, oil hit $146 a barrel, leading us to wonder how high it has to go before Mr. Bernanke admits he has a problem. $200?

"Inflationary pressures seem to us to constitute an even more significant threat to growth than the subprime crisis," Christian Noyer, Governor of the Bank of France, told Le Monde last week. We can't believe we're saying this, but maybe the Fed should take French lessons.

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