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Hong Kong’s ‘Scary’ 7.9% Inflation May Fuel Wages Even as Recession Looms

Hong Kong’s inflation surged to the fastest pace since 1995, encouraging workers to press for higher pay even as the economy teeters on the edge of recession.

The consumer price index rose 7.9 percent from a year earlier after a 5.6 percent increase in June, the government reported on its website yesterday. Excluding distortions caused by a public housing subsidy, prices rose 5.8 percent.

Hong Kong’s economy will shrink again this quarter after a contraction in the three months through June that was caused by an export slowdown, Morgan Stanley and Daiwa Capital Markets say. Wage increases may add pressure on profit margins just as businesses including McDonald’s Corp. (MCD) report that they are grappling with increased rent and material costs.

“The headline CPI figure is pretty scary, and that will change inflation expectations among residents in a drastic way,” said Kevin Lai, of Daiwa, the most accurate of nine economists surveyed by Bloomberg News on gross domestic product for the second quarter. “The higher business costs and rising expectations for wage gains may force some companies to close and hasten the recession,” said Lai, who is based in Hong Kong.

The city’s inflation-linked bonds rose to as much as HK$107.30 ($13.76) on the stock exchange today, the highest since their debut on July 29. They closed up 0.3 percent at $106.90. The initial sale price of the notes, due July 2014, was HK$100.

Food Prices

McDonald’s, the world’s largest restaurant chain, said yesterday that it was raising prices in the city because of surging costs for rents and ingredients. Subway operator MTR Corp. (66) and Hong Kong Disneyland Resort have also pushed up prices.

“The inflationary pressure is particularly worrying when coupled with contracting economic growth,” said Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd. who has worked for the International Monetary Fund and the European Central Bank. The government will need to announce more “relief measures,” including transport subsidies, he said.

Officials across Asia are grappling with inflation that remains elevated even as growth cools. Singapore reported today that consumer prices rose 5.4 percent in July from a year earlier, the biggest increase since January.

Pegged Currency

In Hong Kong, a currency peg to the U.S. dollar means that policy makers can’t use interest rates to tame inflation. Official rates move in lock-step with those of the Federal Reserve, which has pledged to keep borrowing costs at a record low through mid-2013.

The city’s inflation is likely to remain “notable in the near term” for reasons including elevated global food costs, the government said yesterday.

Food costs in the city jumped 7.4 percent in July from a year earlier as pork prices climbed, yesterday’s data showed. Private-housing rentals rose 7.6 percent. The absence of the government subsidy that was in place a year earlier meant public housing rents rose more than 3,000 percent.

The risk of a wage-inflation spiral may have increased after Hong Kong introduced a HK$28 ($3.59) per-hour minimum wage and the government said it was boosting civil servants’ pay by as much as 7 percent for the fiscal year ending in March.

‘Like a Beggar’

Low-income earners, like Nay Leung, 49, an immigrant from neighboring Guangdong province who works as a cleaner and a food deliverer, say that rising prices for everything from food to school books are too much to bear.

“I feel more and more like I am living like a beggar,” Leung, who lives in Kwun Tong district, said in an interview in June.

A record 1.26 million Hong Kong residents were living in poverty as of mid-2010, according to the Hong Kong Council of Social Service, a government advisory group. Wages adjusted for inflation are lower now than a decade ago.

Besides fueling social discontent, worsening inflation may be another blow to investor and business confidence after a 14 percent decline in the Hang Seng Index (HSI) of stocks this year.

The benchmark closed 2 percent higher today after a Chinese manufacturing index rose and as investors speculated that the U.S. Federal Reserve will do more to support growth in the world’s biggest economy.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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