Inflation, food prices soar as HK dollar dives

By Nipa Piboontanasawat  |   2008-6-21  |     NEWSPAPER EDITION

HONG Kong's inflation accelerated last month as food prices climbed and the city's currency fell against the yuan, pushing up import costs.

Consumer prices increased 5.7 percent from a year earlier, the local government said yesterday on its Website. That matched the median estimate of 14 economists surveyed by Bloomberg News. April's gain was 5.4 percent.

Hong Kong gets most of its food from the Chinese mainland, where prices climbed 19.9 percent in May from a year earlier. Rising consumer demand and the weakness of the city's dollar, pegged to the US currency and down almost 6 percent versus the yuan this year, have boosted inflationary pressures.

"Hong Kong is importing inflation from the Chinese mainland because of a rising yuan and more expensive food there," said Joe Lo, senior economist at Citigroup Inc in Hong Kong.

While the currency peg leaves Hong Kong without an independent monetary policy to fight inflation, Financial Secretary John Tsang has cut taxes and distributed subsidies to help people cope. The local government has waived property rates for the second and third quarters of 2007, the whole of 2008 and the first quarter of 2009.

"The inflation outlook is rather uncertain, due to volatile global food prices and the pickup of domestically generated inflationary pressure," the local government said.

Igor's Group, which runs 29 restaurants in the city including Wildfire, Stormie's and Pickled Pelican, has raised prices this year. "The bulk of the cost increases come from food, although rents, salaries and utility bills have also risen," said Linda Kwan, marketing director at Igor's in Hong Kong. "Some of these unfortunately got passed to our customers - there is no way we can absorb everything."

Hong Kong's economy expanded 7.1 percent in the first quarter from a year earlier, the fastest pace in two years, with household spending climbing 7.9 percent.

Food prices rose 11.2 percent in May from a year earlier, the local government said. Rents increased 6 percent and utility costs climbed 6.9 percent.

Inflation will probably more than double in 2008 from 2 percent in 2007, Lo estimated, topping the local government's forecast of 3.4 percent. Producer prices jumped 5.8 percent in the first quarter from a year earlier, the biggest increase on record.

The jobless rate was 3.3 percent for the three months ending on May 31.