YOU KNOW THE OLD RULE - the rich get richer and the poor get poorer. Our consumer price indices show firm evidence of it in relative inflation. The September figure for the composite CPI shows an overall inflation rate of 0.66 per cent year over year. We may have returned to inflation after six years of deflation but we have not gone roaring back into it. The overall figure, however, masks some differences in inflation between rich and poor and these indicate that consumer prices for lower income groups are rising faster than for higher income ones. The red line in the first chart shows you the inflation rate for recipients of Comprehensive Social Security Assistance (CSSA). This comes from a special index compiled for the Social Welfare Department to allow it to adjust CSSA benefits in line with inflation. Welfare recipients experienced a return to inflation well before the rest of Hong Kong and their consumer prices are now rising at a rate of about 1.6 per cent year over year. Then we get the blue line. This represents the CPI(A), which is based on households that had an average monthly expenditure of $4,500 to $18,500 in 1999. It represents about 50 per cent of total households in Hong Kong and here the latest inflation rate is 1.31 per cent. Finally, we get the green line, the CPI(C), based on households with an average monthly expenditure of $32,000 to $66,000 in 1999. The latest inflation rate for these is only 0.22 per cent. Some old golden rules always remain golden, for the few that is. But let us also look at the recent inflation history of Hong Kong in a different context and pardon me if this seems a little complicated but it tells an interesting story. In July 1997, smaller Asian countries were hit by a sudden financial crisis and the currencies of South Korea, Taiwan, the Philippines, Thailand, Malaysia, Singapore and Indonesia all collapsed to greater or lesser extents. China with its fixed exchange rate and closed capital account avoided this trouble while Hong Kong kept its peg to the US dollar and Japan we shall ignore here as it marches to its own drummer. But take those first seven and the red line in the second chart shows you a weighted average of what happened to their currencies relative to the Hong Kong dollar. Let us say that HK$100 in June 1997 bought you the same amount of goods or services as AWC$100 (AWC - Asian-seven weighted currencies). In that case, only one year later you would have needed AWC$200 to buy as much as HK$100 would have got you at that time. Cheap indeed for people in AWC$ countries, a fine inducement for them not to buy things in Hong Kong and a fine inducement for Hong Kong people to go to AWC$ countries to load up on purchases. This clearly introduced a competitive disadvantage for Hong Kong relative to the rest of Asia. But the story does not stop there. There are two sides to this anomaly. The first is obviously the collapse in AWC$ currencies and the second is the difference in inflation rates since that time between Hong Kong and AWC$ countries. What happened since June 1997 was that consumer prices in AWC$ countries rose by a weighted average of 45 per cent while they fell by 12 per cent in Hong Kong. We can do an adjustment for this. Take the difference between our inflation rate and AWC$ inflation and apply it from June 1997 to the purchasing value of Hong Kong dollars. What would the difference now be in the purchasing power of the AWC$ and the Hong Kong dollar? The blue line in the second chart gives you your answer: almost no difference at all any longer. We are about back in balance with the rest of those seven Asian countries again. There you have one of the interesting things about currencies and inflation. They seek balance and they do it without being told to by governments. They may take a long time getting back in balance but balance is where they want to go and balance is what we once again have. jake.vanderkamp@scmp.com
