Old bad habits disfigure price data
The monthly consumer price figures have just been released for May, and once again, things look a little gloomy on the surface, with a deflation rate on the composite index of 4.5 per cent, slightly more than in April.
Let's analyse these figures more closely. The red line in the first chart shows you our overall inflation rate and the blue line what it would be if you took out the housing and clothing elements, about 35 per cent of the index.
With these two out, the deflation rate is clearly much less, only 1.25 per cent, and it is also easing. This would put us about in line with the rest of Asia. We are still showing more deflation but not much more.
Why take out these two? The answer for housing is simple. It is supposed to be a consumer price index but there is not a single price in this component. It is all based on rents, no mortgage servicing costs, no home prices. Specifically, May's 9.8 per cent housing deflation rate was entirely the result of falling private sector rents.
Now that may be a big part of the average expatriate family budget but it is a very much smaller proportion of living costs for long-term Chinese residents, the real representative sample.
Housing inflation is always skewed by this anomaly that it treats as a consumer price item what is really for most people a capital price item.
It is also more a reflection of the things Government does in its gropings to arrive at the right land use policies than of general inflation trends. You cannot ignore it entirely but you should be prepared to discount some of its effect on the CPI.
The story in the garments component is a different one. Take a representative sample of women's outerclothing, say a blouse that we shall assume cost $100 in both Hong Kong and the United Sates in January 1984, three months after the peg to the US dollar was adopted. As the second chart shows, that same blouse would have cost you only $120 in May 1998 if you bought it in the US. If you bought it in Hong Kong, however, it would have cost you $346.
Now why should that be? The two currencies have been linked throughout, they are freely exchangeable and there are few barriers to trade.
Surely by 1998, someone would have come up with the idea of buying blouses off the shelf in the US, selling them in Hong Kong for double the price and finding a ready market with what would still be a 30 per cent discount from Hong Kong prices. Someone has obviously done just that or something very similar. That is why the price of those blouses is now tumbling in Hong Kong.
The fact of the matter is that we are not suffering from the sort of deflation that normally accompanies recession, not when we have just posted our highest quarterly economic growth rate in more than 12 years.
What we are doing is curing a multi-year bout of overpricing. Do you really object? Graphic: mon24gbz