HK's inflation hits 35-month high in June

14:19, July 22, 2011      

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Hong Kong's inflation hit a 35- month high of 5.6 percent in June year on year, and analysts here expected the reading to keep rising before peaking around September.

The city's June consumer price index (CPI) was up from 5.2 percent in May, according to Census and Statistics Department on Thursday.

The underlying inflation rate, which nets out the effects of all government's one-off relief measures, was 5.5 percent in June, larger than that in May of 5.1 percent.

"Inflationary pressures remained notable," a government spokesman said in a statement, adding that private housing rentals and food prices were the two major driving forces accounting about 70 percent of the year-on-year rate of increase in the underlying CPI.

"The economy will continue to face with upward price pressures in the coming months. While global food and commodity prices are likely to stay elevated, domestic cost pressures may also increase as a result of the brisk expansion of the local economy since early 2010," the spokesman said.

Amongst the various CPI components, year-on-year increases in prices were recorded in nine categories in June including alcoholic drinks and tobacco, food, electricity, gas and water, clothing and footwear, housing, as well as transport.

Food prices rose 7.2 percent in June, up from May's 7 percent increase.

Private housing rents rose 7.1 percent in June, larger than May' s 6.6 percent rise.

Donna Kwok, HSBC's China Economist, said Hong Kong had multiple inflation drivers to deal with, including higher food prices, the lagged transmission of last year's residential property price rises, record loose monetary conditions courtesy of the US Fed, and a deteriorating ability to ramp up production to satisfy local demand.

"We expect inflation to hit a three-year high next month, before peaking between 5.8 percent and 6 percent towards the end of the third quarter", Kwok said.

"The cost to an economy that's growing above potential is structurally higher inflation, especially if the economy is running out of spare capacity to step up potential output in order to meet rising demand."

Hang Seng Bank said in its latest economic analyses published this month that food and housing remained the key inflation engines in Hong Kong.

"In the first five months, over half of the increase in consumer price inflation was driven by higher food and housing rental costs."

"Inflation is likely to accelerate in coming months, as there seems to be no signs of cooling in food prices. Private housing rentals are also expected to trend higher on relatively tight supply," the bank said.

The bank maintained that the surge in food prices reflected Hong Kong's vulnerability to imported inflation.

"Hong Kong's food prices track those in the Chinese Mainland closely, typically with a lag of one to four months," Kwok said, adding that food prices will likely feel pressure for most of the second half of this year.

Even once food and property price inflationary drivers ease off, inflation will likely stay above the long-run trend benchmark of 4. 2 percent, with the average inflation at 5 percent this year, she said.

Hang Seng Bank however saw this year's average inflation rate at 5.3 percent, implying inflation rate could be close to 6 percent for the rest of the year, as rising price pressure are emerging from all fronts.

"Until local households and businesses start to rein back spending in response to higher prices, loose monetary conditions will keep aggregate demand and thus inflationary pressures elevated for the rest of this year," said Kwok.

She expected CPI to peak around September, but also noted that the decline thereafter will be very gradual given the amount of Chinese Mainland food and property market price momentum left to feed through to final consumer prices.

Earlier in May, Hong Kong government lifted the forecast rates of headline and underlying consumer price inflation for 2011 to 5. 4 percent and 5.5 percent respectively, from the 4.5 percent announced in the Budget in February.

The government spokesman noted that the trend of rising inflation in the local economy, being part of a region-wide phenomenon, has so far been in line with expectations.

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