How dollar peg and mainland inflation policy will help Hong Kong keep price rises in check

Hong Kong consumers will not be totally spared from rising prices as policy decisions at home and elsewhere take effect
Even so, Beijing’s commitment to curbing inflation and the Hong Kong dollar’s reliable peg should insulate the city from the worst effects

Neal Kimberley

Published: 2:30pm, 11 Jan 2022

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Rising prices are giving policymakers in many jurisdictions cause for concern. The prospect that the US Federal Reserve will quicken the pace of monetary policy tightening could add to those concerns.

Such tightening could lead the US dollar to outperform, pushing up dollar-denominated prices of food and energy in other currency terms. Fortunately, Hong Kong is well placed to avoid some of this upward price pressure.

That is not to say that Hongkongers will avoid higher prices. The start of 2022 has already seen higher transport and electricity costs in the city.

There is also clearly a short-term risk of higher food prices with Cathay Pacific slashing cargo and passenger flights for the rest of January. That move followed the introduction of tighter quarantine requirements for aircrew as Hong Kong continues to try to keep Covid-19 at bay.

In terms of transport, Citybus and New World First Bus have raised the price of journeys by another 3.2 per cent this year under the final phase of a previously agreed government-approved fare adjustment plan.

Meanwhile, people in Hong Kong are receiving less money under the government’s public transport subsidy scheme that is operated in conjunction with stored-value Octopus cards.

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Additionally, higher global energy costs are now feeding through into electricity price rises in Hong Kong. HK Electric has raised its net tariff charge by 7 per cent, while CLP Power has initiated a 5.8 per cent price rise.

Yet, compared to many economies, inflationary pressure in Hong Kong is fairly benign. The overall consumer price index (CPI) in Hong Kong increased 1.8 per cent year on year in November, according to the Census and Statistics Department.

Headline US CPI data for the same month showed an annualised 6.8 per cent increase, the highest level since 1982. In Britain, the figure for November was 5.1 per cent, while in mainland China, the headline reading was 2.3 per cent.

Even allowing for differences in calculation methods, the pace of consumer price increases in Hong Kong appears less pronounced than in those three economies.

Given that Hong Kong imports so much from mainland China, as long as policymakers in Beijing continue to keep a lid on upward price pressures there, the greater the likelihood that Hong Kong itself won’t import too much inflation from the mainland.

As it is, with Chinese policymakers stressing the need to nurture stability in 2022 and Beijing’s longer-term goal of pursuing common prosperity, there is every chance China will endeavour to keep a lid on consumer prices.

China’s resolve will only be stiffened by recent events across the border in Kazakhstan, where rising prices were a key catalyst in the wave of disturbances that erupted at the start of 2022.

Inflation in Kazakhstan was already running at an annualised level of around 9 per cent even before energy prices soared at the start of January. The increase followed the decision, subsequently rescinded, to abolish a long-established cap on butane and propane prices.

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But if Hong Kong’s inflation performance stands up well compared with mainland China, Britain, the US, and certainly Kazakhstan, there remains the wider risk that a stronger US dollar on foreign exchanges could result in US-dollar-denominated food and energy prices rising in local currency terms.

That is where Hong Kong has an advantage, in its Linked Exchange Rate System. Stewarded by the Hong Kong Monetary Authority to ensure the Hong Kong dollar stays within a band of HK$7.75 to HK$7.85 to the US dollar, the system could again prove its worth.

Whatever else happens with regard to broader US dollar appreciation on currency markets, the HKMA’s commitment to ensuring the Hong Kong dollar does not weaken beyond HK$7.85 to the US dollar remains firm, even though that resolve has been challenged by market speculators on occasion.

The bottom line is that Hong Kong now stands to benefit from Beijing’s self-interest in keeping inflation under control on the mainland. Meanwhile, the linked exchange rate will minimise the risk to Hong Kong’s economy of any emerging US dollar strength feeding through into higher local currency prices of US-dollar-denominated goods.

Like the rest of the world, Hong Kong will not avoid rising prices. Even so, the city looks better placed than many economies to be able to resist some of these inflationary pressures.

Neal Kimberley is a commentator on macroeconomics and financial markets