High rents help tip inflation over 2pc, highest since 1998

PUBLISHED : Friday, 23 June, 2006, 12:00am
UPDATED : Friday, 23 June, 2006, 12:00am

Higher rents for private housing and the rising cost of dining out have contributed to inflation topping 2 per cent for the first time in almost eight years, the government says.

A spokesman said moderate inflation was likely to be sustained this year as the labour market improved and domestic consumption drove up prices.

The Census and Statistics Department said inflation rose by 2.1 per cent in May compared to a year ago. This exceeded April's 1.9 per cent rise and is the biggest increase since September 1998 when the level reached 2.5 per cent in the aftermath of the Asian financial crisis.

The government spokesman said private housing rents contributed to higher consumer prices, along with the rising cost of eating out, jewellery and telecommunications charges.

Inflation was likely to be sustained at a moderate level as continuous expansion in production capacity - amid the economic upturn and rapid labour productivity growth - helped maintain a balance between demand and supply of resources, the spokesman said.

'However, certain risk factors from the external front, including gradual building up of global inflationary pressures, high oil prices and renewed weakening of the US dollar, are to be watched.'

Standard Chartered Bank economist Tai Hui, who is sticking to his 2.5 per cent inflation forecast for this year, said he expected the recent sharp rise in rents to gradually taper off as landlords became less aggressive in increasing their rates.

However, Li Kui-wai, a City University professor of economics and finance, warned inflation this year could average between 2 and 4 per cent if the monthly upward trend persisted. He said inflation was a natural trade-off for an improving unemployment rate - which now stands at 4.9 per cent - as greater employment boosted consumer spending and increased prices.

'The jobless rate has been falling fast and we expect it to drop to 4 per cent this year, so we don't see the labour situation deteriorating,' Dr Li said.

'If we assume full employment is around 3 per cent and inflation remains below 3 per cent, this would be tolerable. But this scenario is close to perfection.'

MasterCard International economic adviser for the region, Yuwa Hedrick-Wong, said the ageing population had disposable incomes and were active consumers.




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