It's official: deflation is dead
Tim LeeMaster
Hong Kong's worst bout of deflation in well over half a century is over. Five and a half years of steadily falling prices, driven by the collapse of the property market in 1997, ended as the consumer price index (CPI) jumped 0.9 per cent in July from last year's level, according to the Census and Statistics Bureau. The larger-than-expected gain - a Reuters survey of eight economists forecast a median 0.8 per cent rise - was generally met with aplomb, since it reflects the revival of the territory's economy.
``Apart from the effect of a low comparison base a year earlier [due to Sars], the increase in CPI in July also reflected the combined influence of improved economic conditions, revived consumer demand and rising import prices in more recent months,'' a government spokesman said.
Some economists warned, however, that something more insidious may have been at work. ``Part of it could be higher oil prices and that could provide a bad supply-side shock as opposed to inflation based on a strong demand-driven economy,'' Lehman Brothers economist Rob Subbaraman said. The government said electricity, gas and water prices rose 13.5 per cent, the largest jump of any part of the index. Clothing and footwear rose 7.5 per cent while food rose 3.1 per cent. Housing prices continued to fall, down 2.8 per cent, while durable goods sank 1.8 per cent and alcohol and tobacco dropped 0.1 per cent.
Deflation began in November, 1998 and hit the Hong Kong economy from all sides. Property prices garnered the most attention, falling more than 70 per cent overall, but the general downward ratcheting of prices destroyed corporate pricing power and consumer demand across the board. ``It went well beyond just a property phenomena,'' Bear Stearns Asia equity strategist Michael Kurtz said. ``Utilities costs, clothing, it really was a pretty broad phenomena.''
Short term, the higher prices may be a good thing for the territory's economy, analysts said. ``One interesting thing is the real interest rate is starting to fall fairly sharply,'' Subbaraman said. ``A good, low real interest rate encourages consumer and business spending and that's just what the doctor ordered for the Hong Kong economy.'' The economy has been buoyed by higher tourist spending but with that accounting for only 25 per cent of retail sales economists have long held that local spending had to rise.
A stronger local economy would also help insulate Hong Kong from the expected slowdown in global growth. ``Global trends and China are an obstacle,'' ABN Amro chief strategist Eddie Wong said. ``The US has already peaked and will see a significant slowdown at the end of the year.'' But Financial Secretary Henry Tang said inflation might not necessarily be the next good thing if price levels rise too sharply. Other economists cautioned that negative real interest rates - where the inflation rate is higher than interest rates offered by banks - might lead to over-consumption and asset bubbles as there would be reduced incentive to save.
Most economists believe inflation will pick up speed slowly through year's end. Price rises may also be held in check by the US dollar, to which the Hong Kong dollar is pegged. ``One of the key drivers of local prices has been US dollar weakness but that trend has arrested,'' Kurtz said.
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