The FinanceAsia inflation index drops

In sync with CPI findings, the FinanceAsia inflation index suggests it's mostly good news as the recession results in marginal deflation.

Hong Kong's consumer price index (CPI) is an important economic indicator for the general public. But from the point of view of bankers, the CPI may not capture the expenses they have to incur to maintain a certain lifestyle for themselves and their families.

We addressed this anomaly in 2005 by taking a tongue-in-cheek look at what a banker might realistically be spending. For example, we included the cost of a meal at The Peninsula Hotel, rather than a quick bite at local fast food chain Café de Coral.

We weighted the items to ensure that the index reflects the relative importance of the various expenses that keep a banker in the manner to which he or she has become accustomed. As Hong Kong is a location where most bankers rent rather than buy, and given how pricey real estate in prime areas in Hong Kong is, we give rent the highest weight.

We use the monthly rental on a per-square-foot basis at Mid-Levels condominium Dynasty Court as our benchmark. Other high-weight items include the annual tuition at Hong Kong International School and a car that bankers favour -- we choose to use a seven-series BMW.

At just 22 items, our sampler is a fraction of the more comprehensive 97-item CPI, but we choose to be indicative rather than exhaustive and include items that we believe bankers relate to, if not actually spend on. We cover consumables such as perfume and champagne on our list and also incorporate club memberships, business class flights and holidays. (A full list of items with weightings is presented below.) 

With clouds of recession over the world in general and Hong Kong specifically, inflation was not a major worry last year. According to the Hong Kong Census and Statistics Department, CPI in May fell to zero for the first time since 2005. Our index this year, for the first time, recorded deflation with an index reading of -2%.

The drop in rentals at Dynasty Court is the main contributor to this decline. The fall is in line with some economists' view that Hong Kong real estate is fully priced and will now correct. But we'd note that rents have bounced back quickly from the lows they reached earlier this year and anyone who's renegotiated a lease recently can corroborate that landlords are fast becoming demanding again.

Petrol was another item that fell significantly this year, but given that typical Hong Kong bankers don't commute much, this item does not have a large weighting in our index.

Unfortunately for our high-flying bankers, who are also frequent fliers, lower oil prices have not translated into lower airfares. The price of Cathay Pacific business class tickets increased by 4% this year, as it seems the airline has passed on its oil-price hedging losses to the customer. Of course, when oil prices rise the customer definitely suffers. Last year when we were calculating the index, petrol prices were up by 46% versus 2006. Not surprisingly, airfares rose 11% as airlines passed on the increase in their fuel bill to passengers.

Luxury goods retailers seem unaware that we have had a crisis at all, as the prices of Hermes ties, Louis Vuitton bags, Chanel perfume and other goods from the retail industry have increased, in some instances by double digits. One possible explanation arises from the support of Chinese visitors for Hong Kong's retailers. Recent research published by the Hong Kong Tourism Board found that cumulative mainland Chinese visitors in 2009 are up 7.4% from 2008.

This year's deflation registered by our index is a sharp decrease from last year's 10.3% inflation. Since we first calculated this index in 2005, we have charted a continuous fall in inflation. This is no doubt influenced by the choice of base year -- 2005 was the year the economy completely bounced back from the ill effects of Sars. Hong Kong continues to be an expensive city to live in but our index suggests the rate of increase in the cost of living has been arrested -- for now.

 This story first appeared in the August issue of FinanceAsia.

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