Where to Invest to Escape Inflation

Mutual fund investors seeking low inflation rates will find only a few places that can provide such shelter -- and how long it can continue remains to be seen.

There is a real danger that we may be on the cusp of a runaway inflation rate around the world. The data below compare the year-over-year percentage price increases for 2007 and 2008.

To be clear, the data for 2008 comprises mostly 2007 inflation rates, which were relatively tame, and only the first four months of 2008, where we have started to get a real feel for the underlying inflation in the global picture.

If inflation rates of goods and services continue to rise, the Federal Reserve -- and other global central banks -- may be compelled to raise interest rates, which usually helps contain inflation. That should cause asset prices to fall.

If we look at the major regions and economies, we see that Canada and the U.K. both have lower rates of inflation compared with 2007. Fund investors looking to avoid inflation may want to target funds exposed to these two economies.

Note that Japan is positive after years of deflation, while the U.S. and eurozone are moving into worrisome rates of inflation. The remainder of the year may see further pricing pressures.

	Consumer	Consumer
	Prices	Prices
	YOY %	YOY %
	(04/23/08)	(04/25/07)	Difference
U.S.	4.00%	2.80%	1.20%
Euro Region	3.60%	1.90%	1.70%
Japan	1.00%	-0.20%	1.20%
Germany	3.00%	1.90%	1.10%
France	3.20%	1.20%	2.00%
Italy	3.30%	1.70%	1.60%
U.K.	2.50%	3.90%	-1.40%
Canada	1.40%	2.30%	-0.90%
Source: Bloomberg

In the Asian region, it looks like it's only India that has improved its year-over-year inflation rate. China has experienced a marked increase.

	Consumer	Consumer
	Prices	Prices
	YOY %	YOY %
	(04/23/08)	(04/25/07)	Difference
Australia	4.20%	2.40%	1.80%
China	8.30%	3.30%	5.00%
HongKong	4.20%	2.40%	1.80%
India	5.50%	7.60%	-2.10%
Indonesia	8.20%	6.50%	1.70%
Source: Bloomberg

It is only India that shows declining inflation rates among the BRIC nations; with Russia extremely high and Brazil up but not looking too bad (especially in comparison to the bad old days of the 1970s and 1980s).

	Consumer	Consumer
	Prices	Prices
	YOY %	YOY %
	(04/23/08)	(04/25/07)	Difference
Russia	13.30%	7.40%	5.90%
Brazil	4.70%	3.00%	1.70%
Source: Bloomberg

Staying in Latin America, Mexico looks surprisingly stable, with a mild increase in its inflation rate, up to 4.3% this year from 4.2% last year.

Here is a list of funds that are exposed to the U.K., Canada and India:

Fund Name	Ticker	TSC Rating	1 Month Return	3 Month Return
iShares MSCI Canada	EWC	A	-7.01	-6.41
Eaton Vance Greater India	EMGIX	C	-10.87	-28.1
India Fund	IFN	C+	-9.27	-26.05
Morgan Stanley India Inv Fund	IIF	C	-10.66	-29.16
WisdomTree India Earnings Fund	EPI	N/A	-6.55	N/A
iPath MSCI India Index ETN	INP	C-	-7.56	-30.7
DFA United Kingdom Small Co	DFUKX	C+	-0.41	-5.83
Source: Bloomberg