Hong Kong inflation eases in 1Q12

Inflation is expected to normalize further from 2011’s peak of almost 8%.

Donna Kwok, Greater China Economist at HSBC, noted:

Facts
Headline CPI rose 4.9% y-o-y in March, in line with market expectations but slightly higher than ours of 4.7% (Feb: 4.7%). In light of Chinese New Year distortions, March's CPI print is best compared to the average of January and February 2012, when CPI averaged a higher 5.4%.

Stripping out the impact of one-off government relief measures, March's underlying rate of inflation cooled to a pace of 5.6%, down from 6.1% for January and February.

On a seasonally adjusted sequential basis, Hong Kong's CPI rose 0.4% for the three-month period to March, at the same pace as the three-month period to February.

For the first quarter as a whole, Hong Kong's CPI growth rate declined to 5.2% y-o-y from 5.7% a quarter earlier.

Housing rental accounted for 2.5 percentage point (ppt) of headline CPI growth in March, rising by 7.9% y-o-y (vs. 8.0% in Feb). Food prices contributed 2.0 ppt during the same month, rising by 7.2% y-o-y compared to 6.7% previously.

By category, March saw transportation costs rise by 4.3% y-o-y (Feb: 4.2%), clothing and footwear by 4.0% (Feb: 5.4%) and 'alcoholic drinks & tobacco' by 1.1% (Feb: 16.0%). Prices for electricity, gas and water in contrast fell 18.6% y-o-y (Feb: -17.4%), largely as a result of government electricity subsidy. Prices of durable goods fell as well on a y-o-y basis, by 1.3% (Feb: -1.9%).

Implications
The favorable base effect which kept a lid on inflationary pressures in March should continue for another 3-4 months, provided Mainland vegetable and domestic energy price growth remain under relative control as we expect.

That said, although prices in Hong Kong are cooling, they remain elevated. For example, despite peaking at 7.3% in 3Q11, core inflation (which printed 5.5% in 1Q12 and 6.0% in 4Q11) remain elevated on a historical basis (compared to 3.1% in 1Q11 and 0.6% in 1Q10).

Slower global growth and continued financial market uncertainty is helping to keep demand-pull inflationary pressures in check for now, but as noted before, they will likely snap back just as quickly once global growth finds a firmer footing in 2H12.

Structural factors such as tighter labor market conditions (the unemployment rate is hovering close to a three-year low territory) and continued easy money conditions (thanks to loose monetary policies in the US, Europe and Japan) underlies our expectations for inflationary pressures to start rebuilding in the latter half of this year. Hence our forecast for full year inflation to average 5.3% in 2012 again.

Bottom line: Headline and core inflation in Hong Kong cooled meaningfully in 1Q12 from a quarter earlier. That said, prices remain elevated on a historical basis. Prices should ease for another few months before the cyclical normalization process is completed, after which we expect prices to resume an upward trend in 2H12, keeping the full-year inflation print at 5.3%.