Inflation to reach 4.0% in 2011

Food inflation should be one of those leading the charge – already at a 23-month high in Dec 2010, Hong Kong’s food prices look set to rise further.

According to Standard Chartered, in recent years , the government has been a constant giver of economic concessions – to boost economic growth during the onset of the global financial crisis; to address the ‘deepening of social conflicts’ in the last fiscal year, and to relieve the rising cost of living this time. These issues are more or less inter-related, as all are a result of the still structurally imbalanced economic recovery. The young and the low-skilled remain the last to benefit from the seemingly strong economic performance , and while the middle-class diligently pays taxes, they enjoy few welfare benefits. An extension of some, if not all, of the prior concessions is therefore a logical place to start when trying to gauge what measures are in store in the FY12 budget.

Some of these measures have so far helped (and, if extended, will continue to) suppress the headline Consumer Price Index (CPI) reading – the public rental waivers, for example, caused sizeable plunges in the CPI housing component for the specific months they fell in. Failure to repeat these concessions could automatically push up the year-on-year CPI readings in the coming year simply because of the low-base effect. Beyond that, any other innovative ways (such as the well-received electricity charges subsidy announced in FY09) to provide financial assistance on food, utilities and transport costs would certainly be welcomed.

Standard Chartered's full-year CPI inflation forecast of 4.0% for 2011 (versus 2.5% in 2010) has already taken into account some degree of concession extensions from this upcoming budget. In addition to the CPI housing component continuing to reflect prior years’ property boom in a lagged manner.

Standard Chartered believes the peaks in food and headline inflation this time should be manageable, but the uptrend could nonetheless be protracted, justifying prevailing worries and hence proactive government response, especially from a social standpoint.