Hong Kong's inflation pegged to ease in 2H14

Due to slowing rental inflation.

As the headline CPI eased to 3.6%y/y in 2Q14, it is expected that the CPI will ease more visibly in 2H14, as slowing rental inflation starts to filter through.

According to a research report from UBS, it expects the headline CPI to ease a bit to 3.6%y/y in 2014.

There are two major drivers of Hong Kong’s inflation: First, imported price pressures, driven by Chinese inflation and global commodity prices.

On balance, imported price pressures could remain sticky, as stabilizing commodity prices are being offset by potentially higher Chinese inflation.

Here's more from UBS:

Second, housing rental inflation, which is a direct pass through from residential property price increase.

Rental inflation should nevertheless slow more visibly and drive the bulk of the easing in headline inflation in 2H14, if property prices adjust 20-25% from the peak as per our house view.

In most economies investors watch inflation to assess the risk of shifts in monetary policy.

However, Hong Kong has no domestic monetary policy due to its commitment to the pegged exchange rate, rather it imports the US Fed’s monetary policy regardless of local inflation.

But inflation is still very important to track, because Hong Kong occasionally experiences persistent, negative real interest rates that over-stimulate the domestic economy.