The FinanceAsia inflation index 2008

Inflation is a relative term; relative to your lifestyle. The Hong Kong consumer price index (CPI) may look at items that are important to the masses, but are they relevant to a banker's world? Probably not. To judge the relative increase in costs of living for bankers, one needs to look at a completely different basket of goods, a basket from Oliver's or Great, rather than Wellcome supermarket.

We compiled a tongue-in-cheek list in 2005 and 2006 of how much inflation had risen over the previous years – and have decided to revive this list, given the frequency with which the dreaded I-word has been mentioned of late.

Our Hong Kong-based index tries to capture the sort of items that are typical of a banker's average spend, and likewise includes items that we can consistently measure over time. We also weight the index to reflect the relative importance of the items. It should come as no surprise, therefore, that the top-weighted item is rent. We use the rental cost on a per-square-foot basis of Dynasty Court in the Mid-levels and give rent a 35% weighting. The next largest weighting goes to school fees (we use Hong Kong International School) at 10%.

The other items range from luxury goods – such as Hermes ties, Krug champagne, Louis Vuitton bags – to high-end dining (the Felix restaurant at the Peninsula Hotel) and include one-time buys like a car, a TFT-LCD television, and club memberships. We even include the price of a business class flight to London, bringing the number of items in the basket to 22. While that amount is much smaller than Hong Kong's consumer price index (CPI), which contains 97 items, we feel our index is a good (albeit not exhaustive) indicator of bankers' lifestyle expenses. A full list of items, their change in price and their weighting in the basket is set out in the table on the next page.

So what is the result? With the sharp increase in Hong Kong CPI in 2008 and economic shadows cast from slowing growth in the US, can luxury goods and services maintain price increases? The answer is yes, but at a slower pace. The inflation measured by our index is 10.3%, compared with Hong Kong's CPI in June, which was at 6.1%. The diminishing trend we've observed over the last two years has continued, as our inflation index stood at 20.2% in 2005 (although we'd note the economy was still in recovery post-Sars that year) and 14% in 2006.

The slower pace of luxury inflation was primarily because rents at Dynasty Court increased only 7.1% over our review period versus 36.6% in 2006. A number of economists have been predicting that rental increases in Hong Kong, and indeed across many Asian cities, are not sustainable and will have to plateau. Our index suggests that could be happening. One significant price decrease was the price of LCD televisions, down 68.7% over 2006. This is not surprising though, with the newly launched digital broadcasting signal in Hong Kong and technological advancement and competition causing downward price pressure. Higher oil prices were reflected in significant increases in two of our components: gas prices are up 46% versus the last review period and Cathay Pacific business class fares are up 10.7% as the airline is unable to absorb fuel price increases and is forced to pass them on to travellers.

Even though bankers are worried about an imminent economic recession, our index suggests luxury goods inflation will continue to create pressure on lifestyles. But perhaps some solace can be drawn from the fact that the rate of increase is slowing.

 This story first appeared in the August issue of FinanceAsia.