Why Hong Kong’s Inflation Rates Can Keep Low?

Figure 1 The Great Inflation in the United States, Source: Bryan (2013)

International inflation rates rise sharply in 2021

In 2020, the world was hit by the pandemic and the global economy suffered a severe setback. Countries once fell into economic recession and deflation. But then when the central banks took a concerted action of cutting interest rates to historical lows and other money easing measures, recessions were turned to economic growth.

Figure 2 Production Price Indices of Canada (CAN), Germany (DEU), France (FRA), UK (GBR) and US (USA). Source: OECD data https://data.oecd.org/price/producer-price-indices-ppi.htm
Figure 3 Inflation Rates of Canada (CAN), Germany (DEU), France (FRA), UK (GBR) and US (USA). Source: OECD data https://data.oecd.org/price/producer-price-indices-ppi.htm
Figure 4 Inflation Rates of Hong Kong. Source: Census and Statistics Department (2021)

Reasons for a lower inflation rate in Hong Kong in 2021

To understand the causes of a more severe deflation in 2020 but a milder inflation in 2021 in Hong Kong, we must understand how inflation rate is calculated first. According to the website of the Hong Kong Census and Statistics Department,

Figure 5 Source: Consumer Price Index Weights. Hong Kong Census and Statistics Department (2021) https://www.censtatd.gov.hk/tc/EIndexbySubject.html?pcode=B8XX0021&scode=270

Illustration 1: The impact of doubling pork prices on inflation

For example, Figure 6 shows that the price of pork that has doubled since 2019, but the inflation rate in 2020 was negative. The reason is that pork is classified under the Basic Food category with an expenditure weight of the composite consumer price index of only 10.36%. Furthermore, pork is just one of the 26 basic food items with a net expenditure weight of only 1.35%. In other words, even a 100% increase in pork prices will only contribute to the inflation rate by less than 1.5%.

Figure 6 Price indices of various types of meat in Hong Kong, 2015–2021, source: Census and Statistics Department (2021) https://www.censtatd.gov.hk/en/EIndexbySubject.html?pcode=D5600001&scode=270

Illustration 2: The impact of a 10% drop in rents on the inflation rate

On the contrary, Figure 7 shows that Hong Kong’s residential unit rents have been rising at a rapid rate until mid-2019. In May 2017, it rose at an annual rate of 10.5%, and only started to fall in mid-2019. By August 2020, the rate of decrease was -9.5%, and then slowly slowed down. The trend is highly similar to the Hong Kong inflation rate in Figure 4.

Figure 7 The rental index of private residential units in Hong Kong (blue line-left axis) and its annual changes (blue shaped area-right axis). Source: Hong Kong Rating and Valuation Department (2021) https://www.rvd.gov.hk/en/publications/property_market_statistics.html



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