Consumer price inflation is emerging as a significant worry in Hong Kong. Inflation started to accelerate in the final quarter of 2010, and in April 2011 it reached 4.6% year on year. The main cause of rising inflation has been higher food prices. Hong Kong imports most of its food from China, and food prices are expected to remain elevated in 2011. Another important inflationary influence, especially in 2011-13, is likely to be a rise in rents-the largest element in the basket of goods and services making up Hong Kong's consumer price index. Movements in rents tend to track housing prices with a lag, and rapid increases in property prices during the past couple of years are therefore expected to lead to a sharp rise in rents.
Upside risks to our inflation forecast are posed by the danger of a shock to food prices, possibly arising from higher global fuel prices or from weather-related factors that affect food production in China. Should inflation continue to accelerate, Hong Kong's government would be likely to provide fiscal help to restrain price rises, for example by waiving rent payments for public-housing residents or by subsidising utility bills. Overall, consumer price inflation is expected to be high by local standards in 2011, averaging 4.2%. However, inflation is then expected to decelerate, to average 3.2% in 2012-15. Producer prices are forecast to increase by an average of 4.2% a year in the forecast period.