Wednesday, April 23, 2008

Inflation hits 5.3%

The headline inflation rate for the 12 months to March 2008 was 4.2%. However, if the effects of the Hong Kong government's "one off" relief measures and rebates is netted out, the underlying rate is 5.3% for the same period.

The biggest contributors to the 5.3% rise were food and rents. Food prices have made the headlines with staples such as rice (30%), pork (60%) and cabbage (50%) all becoming a lot more expensive over the last 12 months. Rent increases accounted for nearly a third of the overall inflation number.

In an environment with low unemployment (3.4%), negative interest rates (2-2.5% for borrowers and close to zero for depositors) and a currency which is pegged to the US$, it is difficult to see much scope for domestic factors to result in lower inflation even if food prices stabilise.

Inflation at 4% is a cause of concern. Inflation at above 5% is a major problem because the required nominal rate of return needed to achieve my financial and retirement goals gets pushed to levels which are difficult to sustain without taking on additional risk. That said, at the moment it is quite painless as the combination of negative real interest rates and rising property values has made the private portfolio a beneficiary of far.

No comments: