The city's underlying inflation rate rose to 6.3 percent in August from 5.8 percent in the previous month, driven by increases in private housing rents and the price of fresh vegetables. Nevertheless, economists expect inflation to peak this year and start retreating in 2012.

Headline inflation rose 5.7 percent in August after leaping 7.9 percent in July, the biggest gain in 15 years, government statistics released on Thursday show. The July figures were largely distorted by a housing subsidy that was in place in July 2010 but was absent this year. Excluding such one-off measures, the underlying inflation rate accelerated to 6.3 percent in August from 5.8 percent the previous month.

Higher private housing rents and the rising price of fresh vegetables were the two major contributors to the latest gain. Private housing rents also continued their uptrend, rising 8.6 percent in August. Costs for food in the city, primarily imported from the mainland, continue to rise on the back of increased inflation across the border - and so far there have been no signs of it letting up. Prices for food excluding meals bought away from home advanced 11.7 percent in August, boosted by a 13.4 percent gain in the food component of the mainland August CPI.

And the road ahead may still be bumpy, a government spokesman cautioned. "The inflation is likely to climb up further in the coming months before peaking" he noted at the release of the August numbers. That will take place as earlier increases in international food prices and fresh letting of private housing rentals continue to filter through, he explained.

"Inflation will remain elevated during the next three months," said Daiwa Capital Markets economist Kevin Lai.

The Randstad World of Work Report released on Wednesday found that the majority of Hong Kong's employees will seek pay rises in the years ahead, posing upside risk to the city's inflation. Some 43 percent of the 380 surveyed business professionals will be seeking a pay increase of up to 10 percent, says the report.

However, Lai is of the belief that inflation in the city has already peaked, a view shared by Standard Chartered Bank analysts. "The August CPI reading should be the first step towards a gradual leveling-off of year-on-year CPI growth towards the year-end," said the bank before the release of the August figures.

Lai expects the city's inflation to retreat early next year, citing economic recession and a likely rebound in the US dollar, to which the Hong Kong dollar is pegged.

But the real headache may not be inflation, Lai cautioned. Very likely, the city will have to grapple with deflation, he said. Inflation could be in a steep decline for some months next year, according to Lai. Lai projected average inflation of 5.5 percent for this year, which will dip to an average of 3 percent in 2012.

emmaan@chinadailyhk.com

China Daily

(HK Edition 09/23/2011 page2)