Inflation

Recent reports on the return of inflation to Hong Kong are premature.

The following are some of the newspaper headlines on August Consumer Price Indices (CPI) recently released:

"Inflation returns"

"CPI rose again in August by 0.8% (after increasing by 0.9% in July)"

"Return of inflation makes life difficult"

"Inflation 0.8% last month - negative (real) interest rates return"

I do not know what impression you have reading these newspaper headlines. Inflation in Hong Kong must have been very bad to justify such headlines. Have prices increased in August by 0.8% after increasing by 0.9% in July? Does that mean a total increase of 1.7% in two months? Does that not mean an annual inflation rate of over 10%? But it was only in the first half of this year that everybody was talking about how bad deflation was, running at a rate of 1% to 2% per month, or were these annual rates rather than monthly rates? How is it possible that things could change so rapidly in Hong Kong? If inflation has returned, as these headlines suggest, should I be charging more for the services rendered in my shop down the street? Should I stock up on necessities just in case inflation gets out of hand?

If you are thinking along these lines and asking these questions, I have to ask you to stop doing so immediately. Instead, you should just look up the movements of the actual level of the CPI over the past year or so. The statistics are available on the Census and Statistics Department website. Forget about those so-called year-on-year comparisons that have been so popularly quoted. What you will see is quite simply that the general price level, as measured by the Composite CPI (the index itself), bottomed out in August last year. Since then there was some modest rebound of prices from the bottom in the second half of last year that has been sustained up to January this year, when we had the Lunar New Year holiday. After that, prices settled down and in fact remained fairly stable, except for the small jump in April that can probably be explained by special factors, the Easter holiday among them.

As I pointed out in an earlier column, we probably started to come out of deflation in August last year. Recent CPI figures support this view. But it will be a few more months before we can say with conviction that deflation is totally behind us. The recent sharp increases in the price of oil, a slightly weaker US dollar, some inflation on the Mainland and higher world commodity prices all point to quite a high probability that this will soon materialise. But it is far too early to talk about inflation returning. The general price level, as measured by the Composite CPI, has remained very stable since the beginning of this year, with the exception of January and April. It is time for us all to take much greater care when commenting on the CPI figures. Many commentators missed the timing of the beginning of the end of deflation - on average by seven or eight months. So let's not be too hasty in predicting the return of inflation, particularly when this can be self-fulfilling, in view of the effects of the sensational headlines on inflation expectation, the lack of objective analysis notwithstanding.

Joseph Yam

7 October 2004

Related Viewpoint Articles:

• Deflation in Hong Kong, 20 May 2004
• Deflation, 29 January 2004

Click here for previous articles in this column.

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