Inflation is running away, and by the looks of things if consumers don't curb their spending, things will only get worse. SL Luo reports.

"Sugar's up, salt's up, everything's up. Up, Up, Up."

So goes one of Canto-pop idol Samuel Hui Koon-kit's smash hits of the 1970s, mirroring the hard times Hong Kong had to endure as inflation spun out of control back in those days.

The city, sitting at the crossroads of one of the world's most vibrant commercial and trading regions, has had more than its fair share of economic turmoil - from heart-pounding runs on banks to wild property and stock-market speculation.

Rampant inflation is no stranger either, with soaring prices in almost every sector of life returning to haunt its people.

The latest figures from the Census and Statistics Department are a stark reminder of those woeful years, with the July 2011 inflation rate hitting almost 8 percent - the highest in 16 years, and up from 5.6 percent for the same month in 2010. From 1982 to 2010, Hong Kong's average rate of inflation stood at a relatively mild 4.6 percent. That was after it posted a historic high of 16 percent in October 1981, fuelled by skyrocketing home prices, and then plunging to a record low of -6.1 percent in August 1999 at the height of the Asian financial crisis.

The upward spiral is stoked by a slew of factors from within and without, with the authorities being quick to point the finger at sky-high private housing rentals, pork prices and expensive package tours as the chief culprits.

To start with, the atrociously high rentals for both commercial and residential premises in Hong Kong need no introduction. The operator of a tiny 80-square-foot shop space selling fruit juice on Granville Road, Tsim Sha Tsui, complained to China Daily that she does not understand the logic of people still scrambling for space to do business even though the rent alone can send him to the wall if he fails to make the grade within a year or two.

"I'm paying an astronomical rent for this minute little space here and having to renew my lease every year after which I'm almost certain to face a rent hike of anything up to 70 percent. But, what shocks me is that even before you decide to give up after a year or so, there are already people queuing up negotiating with the landlord to take over from you.

"I'm forced to believe that people are having too much money to speculate in anything and to give it a try no matter what the odds are in a combative and turbulent business environment such as Hong Kong's. And this is driving up prices and causing inflation all round," she grumbles.

Economic experts say higher living costs on the mainland, particularly of food and housing, have aggravated the onslaught, given the close economic links between the mainland and Hong Kong.

They are adamant inflation on the mainland will continue to mount through 2011 and reverberate in Hong Kong which imports a huge chunk of food items from the mainland, and where food prices account for almost 30 percent of the city's inflation gauge, the Consumer Price Index (CPI).

From the commodities point of view, pork lovers have been hardest hit, having to fork out almost HK$40 per catty - an increase of 6 percent in just two months. The explanation for this is simple: Supplies from the mainland are at an ebb as an increasingly affluent society on the mainland has created a huge army of meat consumers. Wholesale monopoly of mainland companies over foodstuffs imported to Hong Kong, although diluted to a certain extent in recent years, still exists. Competition for supplies among retailers and eateries in Hong Kong is intense.

Vegetarian or no vegetarian, housewives say poorer families feeling the pinch may have to give meat a miss and turn to choi sum, lettuce and tomatoes to fill up their dinner tables.

"You're right. Nostalgia, though painful, is back. It reminds me dearly of Sam Hui's songs of the 1970s when we really had to tighten our belts in the face of adversity," says a woman in her seventies making her usual morning rounds at a Wan Chai wet market.

Getting around the city is just as bad, since rising fuel costs have forced public transport operators to hike their fares one after the other. The cost of public transportation is up by an average 4.8 percent compared with two years ago.

As if acting in tandem with the bus and ferry companies, minibus operators plying some 200 routes across Hong Kong have applied for fare increases of 20 to 30 percent this year although they have yet to get the nod from the government .

Even businessman R. Fernandez, who claims he used to fly as much as Hong Kong people take a bus, has been forced to change his travel habits.

Fernandez, who runs a trading firm in Tsim Sha Tsui, would now opt for an airport coach or the Airport Express to get from Kowloon to Chek Lap Kok instead of jumping onto a taxi as he used to, so as to save as much as 70 percent of the cost per journey.

"The euro debt crisis is taking a toll on my business. The sooner it's over the better for me. I have no choice but to keep my overheads down, like traveling expenses," he says.

The jet-set pack's biggest blow has been a mushrooming airport tax which saw a stunning 50-percent hike for long-haul Europe-bound travelers - from last year's HK$2,000 to HK$3,000 - while air fares, generally, have gone up from between HK$200 and HK$500 for shorter trips to destinations in Southeast Asia or the Far East.

One medium-sized travel agency said the holiday crunch has already started with bookings being placed for Christmas and New Year package tours although the festive season is still months away.

Also, gone are the days when you could easily walk into a hotel and check in without much of a hassle and with an array of freebies thrown in, or call up your travel agent and easily had your air ticket booked two days before you leave town.

Outrageous prices and stiff-faced hotel staff are the order of the day, and "sorry, we're full" or "we'll put you on the waiting list" are standard replies when you knock on their doors, meaning no deal regardless of how much you are prepared to offer.

Top-end hotels are apparently leading the pack in the race for higher charges and creating a cyclical effect, emboldened by the continued mass influx of wealthy mainland tourists and the growing number of conferences and exhibitions hosted by the city.

The Hong Kong Hotels Association, which looks after the industry's interests, has forecast that the hotel industry will stay buoyant this year with the return of business travel, the growing demand for MICE facilities as well as a strong mainland economy that has unleashed an unprecedented exodus of wealthy tourists to Hong Kong and beyond.

Hong Kong's hotel rates, which Hong Kong people may see as being "out of context", seem to be a non-affair with middle-income tourist groups from the mainland who are ready to flaunt their wealth in the city, which has been cited as one of the key factors for the CPI's climb.

One local chain, which runs four hotels across the city and is extremely popular with mainland tourists, declined to reveal its occupancy rate or the sort of rates it's charging. But, trying to book a room at any of the hotels any day of the week is almost out of the question.

The rapid appreciation of the yuan, which has soared by almost 20 percent against the Hong Kong dollar for the past six years, may still have another 20-30 percent to climb if forecasts by economic czars are anything to go by, thanks to the continued pegging of the local currency to the greenback. The scenario for the next couple of months is not likely to see any easing of inflationary pressures as free-spending compatriots from the mainland keep flocking to Hong Kong to snap up goods and to consume.

The logic is easy to comprehend - the Hong Kong currency remains hooked to the US dollar which is at its ebb while other global currencies have gone up substantially.

"This is imported inflation which pulls down the value of the Hong Kong dollar. If the greenback were strong, you probably would not see such a situation," argues Professor Larry Qiu Dongxiao of the University of Hong Kong's School of Economics and Finance.

He rejected suggestions by Hong Kong Monetary Authority chief executive Norman Chan Tak-lam that the pegged system does not necessary spur inflation because it has been here for a long time. "But, now, this is exactly what is happening. The pegged system is having an adverse effect on Hong Kong and its economy," Qiu says.

Hong Kong has also found itself in a bad spot with interest rates at almost zero, forcing more people to empty their bank deposits and shift them into gold, property and other investments, thus adding to inflation.

How long would the current inflationary trend likely persist? The crucial issue is whether the fundamental factors fuelling it remain. "I think it all depends on what the mainland and Hong Kong government will do. But, Hong Kong can do very little because we are a small and open economy which, in turn, has to rely on the global economic performance," Qiu adds.

Connie Lau Yin-hing, chief executive of the Consumer Council - the city's consumer watchdog - branded the latest inflationary trend "worrisome," saying the time has again come for Hong Kong people to tighten their belts.

"Prices of everything, especially food and basic commodities, have gone up too high over the past two years, seriously eroding the people's purchasing power," she says.

"Can the poorer families meet their daily basic needs for food, their children's education? When you can't pay for goods or services you could normally have, you have to go for cheaper ones. Hong Kong is a free economy and that's the way it is," Lau says.

In its latest global research report, HSBC warns that unless Hong Kong households cut back spending, inflationary pressures will likely remain for a bit longer. "If inflationary pressures remain as stubbornly sticky for the rest of the third quarter, chances are that consumers may eventually cave in before the rising prices."

The report says that although the July inflation rate of 7.9 percent was below market expectations, inflationary pressures are still hovering at elevated 2008 peak levels.

The major causes of inflation remain housing rental and food prices, which added 5.2 and 2 percentage points to the CPI, respectively.

However, it says although inflation is hitting a post-1995 high on a year-on-year basis, there is no danger of the local economy "sailing into runaway territory".

With growth momentum intact, strong demand, currency depreciation and rising wages will all continue to stoke inflationary pressures in Hong Kong, which means inflation will likely rise through the third quarter.

"As a result, we retain our CPI forecast of 5 percent for 2011 as a whole," the report says.

(HK Edition 09/09/2011 page4)