Thursday, August 21, 2008

Inflation Rises - Growth Slows

Hong Kong's consumer price index rose by an annualised 6.3% in July (up from 6.1% in June). The primary drivers of the continued high levels of inflation were:

1. food (up 11.7%);

2. residential rents. (6.7%);

3. utilities (up 7.9%).

The rise was accompanied by predictions from economists that inflation may have peaked with commodity prices coming off their peak and economic growth showing signs of slowing.

Also released today was a number of revised forecasts for Hong Kong's GDP growth. Lehmans was quoted as cutting their forecast for Hong Kong's 2008 GDP growth from 4.5% to 2.8%.

With borrowing rates for residential property buyers still below 3% (although up from the lows seen earlier this year) and bank deposit rates still generally below 1% (unless you are prepared to lock up a meaningful sum of money for a long period of time), it is still an environment were it should pay to minimise holding cash and resist the temptation to accelerate debt repayments.

The difficulty (as I have painfully discovered) is that an asset like cash which shows a negative real return (and a very low nominal return) is still better than assets which are actually declining in price. In some respects, the current market is rewarding patient investors who are prepared to accept small losses as the lesser of the evils represented by the various investment choices available.

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