Hong Kong’s inflation may have surged to 8.6% in July

We expect headline CPI for July to rise to 8.6% y/y from 5.6%. Note, however, that this is heavily distorted by public rental waivers falling on different months this year and last; removing such one-off base-effects results in a much more reasonable number of 5.8% y/y for July, slightly above June‟s 5.6% y/y. While still-rising food and housing components remain the key drivers, we are also likely to get confirmation that inflation pressures have become more broad-based as the year has progressed, especially for prices of services. We expect headline CPI to continue its seasonal uptrend from August onwards until it peaks sometime towards year-end.

In July we expect Hong Kong registered increases of 10.1% y/y and 12.5% y/y in exports and imports, respectively. The trade deficit should have widened marginally to HKD 40.8bn from HKD 40.3bn prior. Given the still-evident post-earthquake impact from Japan, the euro-area debt crisis and US economic slowdown, Hong Kong‟s trade performance has been steady at best throughout Q2 and on a net basis has been a drag on GDP growth. However, given resilient demand in China and other Asian economies, despite problems in the West, we expect Hong Kong‟s trade sector to be supported by regional trade relationships and pick up momentum again in H2-2011, when the Western economic situation steadies and regional supply-chain disruptions start to fade after the summer.