I have been saying for some time now that import price inflation is something investors should be mindful about. The general trend over time of a depreciating dollar could lead to rising prices of imported goods, a source of inflation that people might not necessarily think about, but that will definitely diminish their purchasing power. (See how The New 60/40 can help protect purchasing power). Last week’s QE3 announcement hinted that the Federal Reserve is focusing more on employment than on inflation. It could even be signaling that it is willing to allow a weaker dollar and inflation to rise if it meant job growth.

Because of this, I noted with great interest that within a period of just two days, two Federal Reserve Bank presidents, John C. Williams and Eric Rosengren, have discussed inflation in interviews and prepared remarks. Williams even went as far as to specifically mention import price inflation.

Williams, who is president of the Federal Reserve Bank of San Francisco, noted in an interview with Market News on Sept. 21 that “Bernanke did not mention the exchange rate channel of monetary policy, in which lower interest rates lower the value of the currency and boost net exports.” But, Williams added, “the exchange rate channel is an important channel of how (monetary policy) affects employment and inflation through import prices.”

The day before, Rosengren, who is president of the Federal Reserve Bank of Boston, said in a speech to the South Shore Chamber of Commerce, “I would point out that our efforts to lower long rates are focused on stimulating domestic demand, but at the same time lower long-term rates affect demand for U.S. assets, resulting in a modest change in the exchange rate—and this is likely to provide some support for export-oriented industries.”

What does this mean? The Fed is signaling not only that it is comfortable with trend U.S. dollar depreciation, but also that dollar depreciation is very much a key component of its monetary policy strategy. In other words, currency debasement is part of the recipe to create jobs. Beware, though: I believe part of this job creation will be paid for with loss of purchasing power for U.S. consumers.

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