Theannualrateofinflation,asmeasuredbytheconsumerpriceindex(CPI),cameinat3。

3%。

It’stheBoE’sjobtokeepitatnomorethan1%aboveorbelowacentral2%target。

Itsfailuretodosowon’thavecomeasmuchsurprisetoMrKing。

He’llhavehadhisquillsharpenedandhisink-wellrefilledatthereadyforquitesometimenow。

TheGovernorhasalreadytoldusallthatheexpectsCPIcouldhitanannualrateofasmuchas4%thisyear。

SoIsuspectthetoneofhislettermaybemore“Itoldyouso”than“whoops,Ididitagain”。

Ifit’sanyconsolationforMrKingandhiscolleaguesontheMonetaryPolicyCommittee,they’refarfrombeingtheonlyonesmissingtheirtargets…

Whyinflationwillgetworsebeforeitgetsbetter

Inflationistakingholdaroundtheworld。

AstheLexcolumnintheFTpointedouttheotherday,“thevastmajorityofcountriesthathaveinflationtargetsarewayabovethem”。

Canadaistheonlyoneofthemajoreconomiesthatiswithinitstarget。

Sowhattodo?

Well,oneoptionistojustdumpthetarget。

Youmaywellaskwhatthepointisonhavingoneinthefirstplace。

That’sexactlywhatTurkey’sdone。

Thecountryhassimplycavedinandprettymuchdoubleditsinflationtargetto7。

5%for2009,from4%。

Itstargetfor2010willbe6。

5%,andfor2011,5。

5%。

AnnualinflationforMaycameinat10。

7%,sotheTurkishcentralbankstillhasafairbitofworktodo。

This,bytheway,ishowyoucanreallytellthatacountryisstillanemergingeconomy。

Theyhaven’tfiguredouthowtolieproperlyyet。

It’slikeseeingafive-year-oldwithhismouthsmearedinchocolatedenyingthatheatethelastpieceofcake。

“Inflation?

Here?

Nah–look,it’sbanginlinewiththetarget。

No,Ididn’tchangeitwhileyourbackwasturned。

It’salwaysbeenlikethat。



Whenyou’reamatureeconomyyoudon’tdothosesortsofthings。

No,whatyoudoisfindspuriouswaystoadjusttheunderlyingnumbers。

Youacknowledgethatheadlineinflationlooksbad,but‘core’inflation,whichexcludesfood,energyandallthoseotherthingsthataregoingupinprice,looksOK。

Butwhatdoyoudowheneventhatstopsworking?

Thegrimrealityisthatcentralbanks(i。

e。

governments,whatevertheysayaboutindependence)don’twantinterestratestorise。

Thatspellsrecessionasfarasthey’reconcerned。

Recessionmeanspain,andvotershatepain。

Sowhiletheymighttrytalkingtough,they’remorethanlikelytostaybehindthecurveoninflation。

AlreadysomeFederalReserveofficialsareback-pedallingafterBenBernanke’scommentsoninflationsawthemarketspricinginthreetofourhikesinthekeyUSinterestratebeforetheendoftheyear。

AndwhileMervynKingcertainlyseemstohavehisheartintherightplacewhenitcomestoinflation-fighting,there’snowaytheTreasurywilllethimhikeratesinthefaceofarecession。

Notwithoutafightatleast。

Wemayyetseepressuretochangeinflationtargets,Turkey-style,beforetheyearisout。

Sowhatdoesallthismeanforyourinvestments?

TheUSandBritainaredefinitelyfacingrecession,probablycombinedwithinflation,followedquitepossiblybyaperiodofdeflation。

Atvariouspointsinthatcycle,differentinvestmentswilllookgood–butwithsomuchuncertaintyovertiming,it’snoteasytocallwhichones。

WhynowisthetimetoinvestinJapan

ButwhyworryabouttheUSandBritainalonewhenwehavethewholewonderfulworldtoinvestin?

Andwhenyoulookatitthatway,there’sanobviousmarkettobuyjustnow。

Japanispossiblytheonlymajoreconomyintheworldwherethereturnofinflationisagoodthing。

YoucanreadmoreaboutitinthelatestissueofMoneyWeek(ifyou’renotalreadyasubscriber,subscribetoMoneyWeekmagazine),butafteryearsoffallingprices,thethreatofhighercostsisjustwhattheJapaneseneedtogetthembackoutintotheshopsandspendingagain。

We’renottheonlyoneswholikeJapanjustnow。

IwasflickingthroughUSfinancialpaperBarron’syesterday。

Oneofthecontributorstotheirmid-yearroundtablewasDrMarcFaberofTheBoom,GloomandDoomReport,someonewho’salwaysworthlisteningto。

SoIwaspleasedtoseethatJapanwasamonghistoppicksforjustnowtoo。

ThecaseforJapanisnotjustaboutinflation。

AsDrFaberpointsout,“pensionfundsandforeigninvestorsarestartingtohavemorepoweroverJapanesemanagement”,citingtherecentoustingofwig-makerAderansHoldings’(TYO:8170)managementbyactivistUShedgefundSteelPartners。

Dividendsarealsoontherise。

He’salsokeenongold,anothergoodhedgeagainstinflation。

“Thepricecouldgodownto$780to$800anounce。

Ifyouhavenoexposuretogold,startbuyingithere。

”YoucanfindouthowtodosoontheMoneyWeekwebsite:Investingingold

Turningtothewidermarkets…

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