China's consumer price inflation cooled in July to 1.8 percent. In the past few years, the country has been experiencing the common problem that troubles almost all emerging economies - rising prices of general goods as the economy expands rapidly. Easing inflation has given the Chinese government more room to loosen monetary policy. The easing of inflation is not only good news for the mainland but also for Hong Kong, since most of the food and consumer products consumed in the city are imported from the mainland.

Though the latest figures show that the Consumer Price Index (CPI) growth in China eased to 1.8 percent in July, there is still doubt on whether it really indicates a relief on the heavy burden of goods' prices for mainland residents.

As for Hong Kong, which is affected by mainland inflation, the composite CPI in June was 3.7 percent, which is a moderate figure. However, there is a tendency to rise. The CPI has been divided into four categories in Hong Kong - the Composite CPI, CPI (A), CPI (B) and CPI(C), based on the prices of a basket of goods that different types of income households would purchase in Hong Kong. The Composite CPI reflects the impact of consumer price change on the household sector as a whole, whereas CPI (A), CPI (B) and CPI(C) relate to households in the relatively low, medium and relatively high expenditure ranges, respectively. The sectors that take up the largest portion of CPI in calculation are house rents and food in Hong Kong, especially for low-income families, which are very sensitive to fluctuations in food and housing rental costs. These two sectors account for 33 to 35 percent in CPI (A), respectively. Rentals for both private and public housing are soaring year by year due to unbalanced demand and supply, and the most recent announcement of the government's raising public-housing rents has aggravated the situation.

Simultaneously, since Hong Kong nearly has little agricultural output, expenditures in both dining out and self-cooking frequently fluctuate according to the food-price changes on the mainland and other major sources, such as the United States and Australia. While the seemingly cool-down or even reversion of the appreciation of the yuan recently has relieved Hong Kong food importers' pressure on food prices, the effects are obviously not enough because we also have to take the minimum wage policy into account. Furthermore, the US, one of the world's biggest food-producing and exporting countries, is going through its most severe drought in 60 years, resulting in a sharp drop in crop harvest this year, especially for corn and beans. The price of corn has gone up by more than 30 percent so far this year due to the drought. The expected huge loss from crop failure in the US will lead to higher food prices.

Soaring housing rentals and food prices may lead to higher inflation in Hong Kong in future, and since low-income households spend most of their earnings on food and other basic needs, the CPI (A), which reflects the purchasing power of low-income families, will surge accordingly. How to help keep the living standard of those living at the bottom of Hong Kong society is an urgent issue for the government. Measures such as stabilizing food prices and distributing allowances may help ease the problem. In addition, the government may need the cooperation of more social enterprises and build up more food banks. Whether the recent drop in CPI indicates a trend is still uncertain and we should keep an eye on inflation in the coming months.

The author is Associate Professor at Department of Finance & Decision Sciences of Hong Kong Baptist University. The views expressed here are entirely his own.

(HK Edition 08/22/2012 page2)