Inflation in Hong Kong and everywhere else
With soaring oil prices, everyone suffer from the effects of inflation… Shopping in HK used to be very affordable. It’s still cheaper than shopping in Australia, but it’s nowhere as cheap as how it used to be. Nowadays when you go shopping in HK, you shop for the style and quality, rather than for the price. Need to remember that for the same price, you can get something a lot better in HK than what you can get here… and this is the same with shopping in Japan.
Hong Kong’s Inflation Outlook
(from HKTDC 25 July, 2008 Content provided by Hang Seng Bank)
The mounting inflationary pressure has changed the economic landscape significantly recently. Inflation in Hong Kong surged to 11-year highs, spreading beyond food to other consumer goods and services. Non-food inflation jumped from around 2% at the beginning of the year to 4.5% in June. What are the main culprits?
A softening currency exposes the highly import-dependent Hong Kong economy to imported inflation. Hong Kong’s trade weighted real effective exchange rate has depreciated 13.7% since November 2005. According to a government study, a 10% appreciation of the Hong Kong dollar may help push down inflation by 0.6%. In other words, the 13.7% depreciation is likely to have lifted Hong Kong inflation by less than 1%.
Inflation seems to stem more from soaring oil prices. At today’s prices, if adjusted for inflation, oil has already surpassed the 1980-peak. Similar pace of oil price rises was also seen in previous oil crises, in 1973/74, 1979/80 and 1999/2001. What does that mean for Hong Kong? History seems to suggest that Hong Kong’s inflation is poised to jump and the real GDP growth to decelerate! What matters more may be the magnitude of the downturn.
Projecting on the trajectory of oil prices, we see three possible scenarios – namely “global stagflation”, “global slowdown” and “industrial world downturn”. At this stage, we do not see a 1970s-style global stagflation as a likely scenario, unless the outbreak of wars or other disruptions threaten oil supply, leading to a further spike in oil prices.
Likewise, the “industrial world downturn” scenario seems increasingly a scene of the past. Latest indicators show that the US weakness seems to have spread beyond the industrial world. The Asian Development Bank has just revised downward its 2008 growth forecast of developing economies in Asia to a five-year low on a more protracted US slowdown and elevated food and oil prices. The global economy seems to be on the verge of a “synchronized slowdown”.
Against this backdrop, Hong Kong’s inflation looks set to climb. Nevertheless, the government’s newly proposed HKD11 billion relief measures is likely to suppress headline consumer price inflation in the coming months, helping to keep the full year inflation rate at 5.0%. Elevated oil prices would mean that inflation could stay high in 2009, but probably not skyrocketing, as a global downturn would eventually dampen oil demand, putting a lid on oil prices and taming inflation. We see 2009 inflation stay high at 5.0%.
Download full report at HKTDC (PDF)
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