Why Hong Kong is well placed to limit inflationary pressures

There will be some pain, but Beijing’s desire to curb rising prices and the currency peg should help city stave off the worst effects

Rising prices are giving policymakers in many jurisdictions cause for concern. The prospect that the US Federal Reserve will quicken the pace of monetary policy tightening could add to those concerns.

Such tightening could lead the US dollar to outperform, pushing up dollar-denominated prices of food and energy in other currency terms. Fortunately, Hong Kong is well placed to avoid some of this upward price pressure.

That is not to say that Hongkongers will avoid higher prices. The start of 2022 has already seen higher transport and electricity costs in the city.

There is also clearly a short-term risk of higher food prices with Cathay Pacific Airways slashing cargo and passenger flights for the rest of January. That move followed the introduction of tighter quarantine requirements for aircrew as Hong Kong continues to try to keep Covid-19 at bay.

In terms of transport, Citybus and New World First Bus have raised the price of journeys by a further 3.2 per cent this year under the final phase of a previously agreed government-approved fare adjustment plan.

Meanwhile, people in Hong Kong are receiving less money under the government’s public transport subsidy scheme that is operated in conjunction with stored-value Octopus cards.

Higher global energy costs are now also feeding through into electricity price rises in

Hong Kong. Hongkong Electric has raised its net tariff charge by 7 per cent, while CLP Power has initiated a 5.8 per cent price increase.

Yet, compared to many economies, inflationary pressure in Hong Kong is fairly benign. The overall consumer price index (CPI) in Hong Kong increased by 1.8 per cent year on year in November, according to the Census and Statistics Department.

Headline US CPI data for the same month showed an annualised 6.8 per cent increase, the highest level since 1982. In Britain, the figure for November was 5.1 per cent, while on the mainland, the headline reading was 2.3 per cent.

Even allowing for differences in calculation methods, the pace of consumer price increases in Hong Kong appears less pronounced than in those three economies.

Given that Hong Kong imports so much from the mainland, as long as policymakers in Beijing continue to keep a lid on upward price pressures there, the greater the likelihood that Hong Kong itself will not import too much inflation from the mainland.

As it is, with mainland policymakers stressing the need to nurture stability in 2022 and Beijing’s longer-term goal of pursuing common prosperity, there is every chance the country will endeavour to keep a lid on consumer prices.

China’s resolve will only be stiffened by recent events across the border in Kazakhstan, where rising prices were a key catalyst in the wave of disturbances that erupted at the start of 2022.

But if Hong Kong’s inflation performance stands up well compared with the mainland, Britain, the United States and Kazakhstan, there remains the wider risk that a stronger dollar on foreign exchanges could result in dollar-denominated food and energy prices rising in local-currency terms.

That is where Hong Kong has an advantage, in its Linked Exchange Rate System. Led by the Hong Kong Monetary Authority to ensure the Hong Kong dollar stays within a band of HK$7.75 to HK$7.85 to the US dollar, the system could again prove its worth.

Whatever else happens with regard to broader US dollar appreciation on currency markets, the authority’s commitment to ensuring the

Hong Kong dollar does not weaken beyond HK$7.85 to the greenback remains firm, even though that resolve has been challenged by market speculators on occasion.

The bottom line is that Hong Kong now stands to benefit from Beijing’s self-interest in keeping inflation under control on the mainland. Meanwhile, the linked exchange rate will minimise the risk to Hong Kong’s economy of any emerging US dollar strength feeding through into higher local-currency prices of US dollar-denominated goods.

Like the rest of the world, Hong Kong will not avoid rising prices. Even so, the city looks better placed than many economies to be able to resist some of these inflationary pressures.

The start of 2022 has already seen higher transport and electricity costs in the city