The FinanceAsia inflation index is up again

After a drop last year, our luxury index is on the rise. The silver lining: it's only a single-digit increase.

The rising cost of fish and vegetables helped consumer prices to rise 1.9% in July, according to Hong Kong’s government bean counters. Such data certainly reflects the increasing cost of living for a taxi driver, but it doesn’t say much about the inflationary impact on a banker or chief executive’s lifestyle.

To address this anomaly, FinanceAsia has compiled a more representative basket of goods that mirrors what our readers might actually be spending their hard-earned money on. We weight the items according to their relative importance, with the highest weight given to rent -- we use the monthly rental on a per-square-foot basis at Mid-Levels condominium Dynasty Court as our benchmark. The annual tuition at Hong Kong International School also takes an important share in our basket.

Our sample is meant to be indicative rather than exhaustive. After all, the government’s data reflects 45,000 different prices -- far more than we can manage in our afternoon jaunt around Central. We make up for that by ignoring the price of fish and focusing instead on the price of fish eggs -- as well as club membership fees, luxury cars, business class flights and holidays, and everyday essentials for the average high-roller, such as perfume, designer bags and champagne. We try to stay abreast of technological changes, too, so this year we replaced the Samsung 32-inch LCD television we used in the past with the latest LED technology.

After plugging in the new prices from our shopping list, our index shows that luxury inflation has risen 5.01% since last year -- more proof, if any was needed, that the recession is well and truly behind Hong Kong, if indeed it ever hit the city at all.

The main contributor is the 11% rental increase at Dynasty Court. The rent has reached $49 per square foot, slightly surpassing the rental rate before prices fell in the second half of 2008. Hong Kong’s luxury real estate market seems to have completely bounced back.

Prices related to tourism and leisure activities also increased sharply. The cost of a night at the Banyan Tree in Phuket continues to go up, although the 14% increase this year is not as sharp as the 45% increase last year. A bottle of Krug Grand Cuvee at the Mandarin Oriental’s Chinnery bar costs almost 30% more than it did a year ago. Club membership fees also grew by around 10% after experiencing a decrease last year.

At the other end of the spectrum, the biggest price drop is the Samsung LED TV -- technologically more advanced than last year’s LCD, but still 28% cheaper.

Oil prices increased slightly this year after losing 34% last year. But oil has a small weight in our basket, given that many bankers don’t commute too far. However, when it comes to travelling, air fares matter to our readers and there is good news on that front. The cost of Cathay Pacific business class tickets from Hong Kong to London fell by 5% this year.

Prices of luxury goods increased steadily at a rate between 1% and 6%, cooling down from last year’s dramatic double-digit gains. The prices of retail goods such as caviar and cigars have remained almost the same.

When we calculated our inflation index last year, the Hong Kong economy was just coming to terms with the fact that the financial crisis was not going to have a cascading, knock-on effect across Asia and specifically across Asia’s banking community. Back then, our index showed a deflation of 2% -- the first time ever that the cost of living for an executive fell since we started calculating our index in 2005.

That anomaly has now corrected and we are back to positive territory, with our cost of living index recording inflation of 5% this year. Our readers can take heart from the fact that the number is still significantly below the double-digit inflation they had to deal with in the wake of Sars.


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