Money and Inflation

Money is nothing but a stacks of papers and numbers before you use it to buy things or services. Therefore, the value of money is equivalent to its purchasing power. A fall in the value of money is the same as a general rise in price of goods. We measure the changes in the value of money by observing changes in prices of a basket of goods which are commonly bought by the majority of people over given periods.

Inflation happens when purchasing power increases faster than the output of goods and services. The result leads to a general rise in prices. In HK, Consumer Price Index (CPI) relates to inflation of consumer goods and services affecting households. But CPI is different from the cost-of-living index in the effect of substitution. Due to the effect, people tend to buy more of the goods and services with relatively smaller price increases [or relatively larger price decreases] and less of those with larger price increases [or smaller price decreases]. Therefore, CPI tends to show larger price increases and smaller price decreases than the cost-of-living index over time.

Census and Statistics Department of HKSAR compiles four series of CPI based on the expenditure patterns of households in the relatively low, medium, and high expenditure ranges. Expenditure component and weighting:

• Food - 26.94 (26.67)
• Meals bought away from home - 16.86 (16.39)
• Other foodstuffs - 10.08 (10.28)
  
• Housing - 29.17 (29.91)
• Private dwellings - 23.93 (24.59)
• Public dwellings - 2.49 (2.07)
  
• Electricity, gas and water - 3.59 (2.98)
• Alcoholic drinks and tobacco - 0.87 (0.94)
• Clothing and footwear - 3.91 (4.13)
• Durable goods - 5.50 (6.24)
• Miscellaneous goods - 4.78 (5.70)
• Transport - 9.09 (9.01)
• Miscellaneous services - 16.15 (14.42)

Note: Figures in brackets refer to the corresponding year-on-year rates of change computed from the old 1999/2000-based CPI series.

The latest values are calculated from the base (=100) of Oct 2004 - Sept 2005.

The CPI(A), CPI(B) and CPI(C) respectively cover some 50%, 30% and 10% of households in Hong Kong. The Composite CPI (CCPI) accounts for 90% of the households with monthly expenditure ranging from $4,000 to $59,999.

The monthly household expenditures (in HK$) of these groups in the base period (i.e. October 2004 - September 2005) were $4,000 - $15,499, $15,500 - $27,499 and $27,500 - $59,999 respectively. The values for 1999/2000-based CPI series were $4,500 - $18,499, $18,500 - $32,499, and $32,500 - $65,999 respectively.

Taking into account the impact of price changes since the base period, the monthly household expenditure ranges of the CPI(A), CPI(B), and CPI(C) adjusted to the price level of 2006 are broadly equivalent to $4,100-$15,800, $15,800-$28,200 and $28,200-$61,500 respectively.

Inflation reduces the real value of money by reducing its purchasing power. This affects its role as a store of value. With further increases in the inflation rate, its role as a standard for deferred payments is underminded - difficult to get loan because lenders will demand a large forward rate for the risk.

There are five major causes of inflation that are operating in HK now:

1. Strong public demand for loans from financial institutions and households - money supply increases. (China)
   
2. Heavy government spending to reflate the economy, in order to finance budget deficits - if the increased output does not match up with the increased demand. (USA)
   
3. Successful and continuous demand for higher wages by the trade unions. (HK)
   
4. In times of rising inflation, an 'inflationary psychology' motivates people to spend savings quickly to avoid further decline in their money value. (China, HK)
   
5. Under fixed exchange rate - imported inflation through the price chain, raises the domestic price level. (HK)
   

Life is not a job but it is of buying and buying in HK.