Inflation will move up in Hong Kong in 2011

According to the Composite Consumer Price Index (CPI) released from the Census and Statistics Department of HKSAR, overall consumer prices rose by 3.1% in December 2010 over the same month a year earlier, larger than the corresponding increase (2.9%) in November 2010. For 2010 as a whole, the Composite CPI was on average 2.4% higher than in the preceding 12-month period.  

The accelerating trend remains in place to push inflation even higher in 2011. The composite CPI is projected to go up to 3.5% year on year in the first quarter of 2011 and annual inflation is projected to advance 4% in 2011.

Factors led to the increase in inflation in Hong Kong

 
Appreciation of the Renminbi

The persistent appreciation of Renminbi versus Hong Kong dollars gives rise to the continuous increase in prices of goods imported from the mainland to Hong Kong and therefore put an upward pressure on import prices.

As most of foodstuffs are imported from the Mainland, increases in basic food prices in Hong Kong will have a big impact on lower-income households in which foodstuffs account for a larger proportion of their household expenditure.

High-liquidity environment and inflow of capital to property markets

After the financial tsunami, the low-interest-rate and high-liquidity environment has led to the flooding of the international capital in the property market in Hong Kong and Asia. When the arrival of these hot money inflows combined with the ultra-cheap mortgages and the housing supply shortage in Hong Kong, secondary residential property market prices have been boosted almost 50% since the beginning of 2009. Under this environment, the increase in the private housing rentals will then follow.

 
Soaring global food and commodity prices

Recently, the further quantitative easing in the United States and the recovery of global economy have led to further capital flight to agricultural products and commodity markets. The hot money inflows to the commodity markets along with the supply shortage of agricultural products and natural resources will also boost the global food and consumer product prices.

 
Comment

The Hong Kong economy is likely to face with higher inflationary pressures in 2011, due partly to the pick-up in import prices amid rising global food and commodity prices and partly to the soaring housing rentals and prices along with the high-liquidity conditions.  The Government should introduce measures in its 2011/12 budget to relieve the impact of the robust inflation on the Hong Kong residents, especially the lower-income people.