Inflation picks up as food prices soar

PUBLISHED : Friday, 21 September, 2007, 12:00am
UPDATED : Friday, 21 September, 2007, 12:00am

Escalating food prices pushed the core inflation rate slightly higher to 2.7 per cent last month, although government rates concessions kept the headline figure at 1.6 per cent, the government said.

The August consumer price index was largely in line with consensus estimates. It continued the upward inflationary trend that has seen prices rise steadily from 1.2 per cent in May to 1.5 per cent in July, or 2.6 per cent without the concessions.

According to the Census and Statistics Department, food prices, which rose 4.6 per cent in August compared with 3.6 per cent in July, were the main contributor to rising consumer prices.

A government spokesman described the underlying inflation rate of 2.7 per cent as 'moderate'.

'Looking ahead, higher food prices will continue to pose an upside risk to inflation,' he said.

'With the favourable effect of the rates concessions fading out after September, the headline inflation rate is expected to edge higher in the fourth quarter.

'Nevertheless, the recent cut in public housing rentals and sustained labour productivity growth will provide some cushioning effect.'

The government concessions were effective from April to September. Economists expect core inflation to reach about 3 per cent in the fourth quarter after the relief measures expire.

HSBC economist George Leung Siu-kay said inflation would probably reach 4 per cent next year given the buoyant mainland and local economies and the recent cut in the US interest rate.

However, he played down fears of an asset price bubble.

'Yes, inflation and asset prices are rising, but this is not strong enough to create a bubble.'

The US Federal Reserve earlier this week cut its benchmark interest rate by 50 basis points to 4.75 per cent, its first rate cut in four years. Hong Kong banks followed by cutting its prime rate by 25 points.

Because Hong Kong's currency peg to the US dollar means local interest rates track US rate movements, Hong Kong's interbank rate could fall to about 4 per cent next year from 4.5 per cent, Mr Leung said.

This would mean zero or marginally negative real interest rates - when interest rates fall below the inflation rate. But Mr Leung said he did not believe this would cause an asset bubble.

The interbank rate is the interest rate banks charge for very large short-term loans to other banks.

Hang Seng Bank economist Vincent Kwan Wing-shing said the effect of lower interest rates on asset prices was positive for the local stock and property markets, although it would not boost inflation immediately.

'Negative interest rates stimulate investment and spending and push up asset prices. People just need to be aware that the economy is expected to develop in that direction over the next few months.'

However, Li Kui-wai, an associate professor of economics and finance at City University, said he feared record-high inflation on the mainland, especially in the prices of food, which Hong Kong imports, was creating an unhealthy environment for growth in the city.

Government data shows food costs rose 7.8 per cent in the August consumer price index. Pork prices jumped 31.4 per cent; eggs were up 27.9 per cent; canned meat rose 20.7 per cent; beef climbed 15.8 per cent; frozen meat increased 14.9 per cent and poultry rose 12.1 per cent.