Wednesday, August 24, 2011

Inflation hits 7.9%

That's right - Hong Kong's CPI for the year ending July 2011 hit 7.9%. This is the highest level since November 1995 (8.4%) and compares to 5.6% for the year to June.

The main contributors to the sharp rise were (i) rents (ii) food (iii) travel.

The HKSAR government made a rather feeble attempt to spin the number saying that it was partly due to a lower base comparison arising from one off concessions granted in July 2010 (in particular a waiver of public housing rentals that month). At best, this is misleading as it is simply another way of saying that CPI was understated a year ago.

Some granularity:

  • alcohol and tobacco rose 20.1% (there was an increase in the tobacco tax)

  • housing rose 16.4%

  • food rose 10.7%

  • clothing and footwear rose 7.3%

  • dining out rose 5.5%

  • transport rose 4.8%

  • utility costs fell 16% (the government used taxpayers money to subsidise eletricity consumption)

Even if you accept the government's arguement that the effective CPI was "only" 5.8%, this is still higher than the average pay increase (civil servants and a few other small groups excepted), much higher than the yield on good quality HKD bonds and multipiles of HKD bank deposit rates. For investors, the message is pretty clear - if you want to mainatin the real value of your investments, you have to buy risk assets and/or be a borrower. Conservative savers are keeping their money nominally safe, but accepting an assured destruction of real value.

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