CATHAY Pacific's results highlighted the problem of Hong Kong's persistently high inflation; the financial secretary's Budget described inflation as ''probably the most intractable challenge''.
In general, rapidly increasing prices are not consistent with optimistic economic projections - so in what ways is Hong Kong different? And which local listed companies particularly suffer or benefit from relatively high inflation? The main contributors to local inflation are shortage of labour and land. Both result from Hong Kong's unusual political position as a city without a hinterland.
A normal response to high costs is for labour intensive industries to relocate.
This has been relatively difficult. However, the opening up of China has made it possible, and for many years now the size of the local manufacturing labour force has fallen at an annual rate of about 10 per cent as factories relocated.
Hence, while inflation has hovered around double digits, export prices have increased by only about 1-2 per cent per year with no noticeable damage to margins.
This has kept the pressure off the currency peg. Interest rates have therefore been able to track US rates, resulting in negative real interest rates.
The companies which suffer, therefore, are the labour intensive ones which find it most difficult to relocate. These include the hotels, retailers and other service industries such as Cathay.
