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WEALTH INFLATION

Above the line

Luxe lifestylers are exposed to higher inflation than common consumers

 

The inflation topic is never far from people's minds, especially in Hong Kong. Is it being measured correctly? Should adjustments be made to the basket? What matters more, core or headline inflation?

The common denominator is the realisation that everyone experiences a different inflation, depending on a huge range of factors, notably lifestyle. In other words, sadly we may not know how the cost of chartering a yacht in Phuket has evolved over the past year, but we are acutely aware of how much more expensive the de rigueur morning coffee has become.

For the third year running, the Bank Julius Baer Wealth Report on Asia features a lifestyle index that covers 20 luxury goods and services in four key cities.

Ranging from wine, cigars, Botox injections, a luxury Mercedes, to the cost of overseas education, the Julius Baer Lifestyle Index rose by 8 per cent on year in US dollar terms for the 2013 measurement period, slightly below the increase registered last year.

The basic message behind the index is unchanged: the cost of luxury living in Asia has a clear tendency to increase faster than a basket of goods weighted for standard consumption. This has implications for rich investors: the personalised definition of "real returns" should encompass the standard consumer price index with an added luxury price premium.

Building upon previous editions of the wealth report, 2013 marks the start of a much broader data collection effort,incorporating price changes from 11 major capitals across Asia, including Tokyo.

In Asia, we forecast China to be the driver of new wealth, accounting for 1.65 million rich individuals in two years' time. Of these wealthy individuals, about 84 per cent will come from the mainland. Hong Kong should see 131,000 wealthy individuals by 2015, up from 113,000 currently. With such increases in wealth on the horizon, keeping tabs on the evolving costs of luxury lifestyles should be of avid interest to anyone active in providing goods and services to this wealthy income segment.

While the luxury price premium may hover at the current level for the next few years, it still reinforces that for all investors, inflation-adjusted returns really matter, especially in Hong Kong.

 

Stefan Hofer is an emerging markets economist for Bank Julius Baer

 

 

 

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