Voluntary Report - Public distribution

**Date:** 4/21/2008

**GAIN Report Number:** HK8011

HK8009

**Hong Kong**

**Market Development Reports**

**Hong Kong Food Inflation**

**2008**

**Approved by:**

![](media/image1.wmf)Philip Shull

U.S. Consulate, Hong Kong

**Prepared by:**

Caroline Yuen

**Report Highlights:**

Between February 2007 and February 2008, food prices increased 19.5
percent. The annual statistics, as stark as they are, mask the fact that
most of the price increases have taken place in recent months. Retail
food prices between January and February 2008 alone rose 6.4 percent,
accounting for one-third of the annual increase. Despite this increase,
the Hong Kong government has not implemented any programs to encourage
local food production or to restrict food exports. Hong Kong is almost
completely import-dependent for its food supplies. It supports
insignificant farming and a very small food processing industry. Neither
does it hold any food reserves. Food inflation in Hong Kong has been led
by steep increases in meat prices. The year-on-year change in pork price
for February 2008 was 56 percent. Hong Kong's inflation is also fuelled
by a host of internal factors including strong domestic demand, a
weakening currency that is tied to the U.S. dollar, and rising food
prices in Mainland China, Hong Kong's largest supplier. Hong Kong is an
affluent economy with an average of 10 percent of household expenditure
spent on store-bought food and another 17 percent on eating out. Hong
Kong does not receive any food aid.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Hong Kong \[HK1\]

\[HK\]

Hong Kong's accelerating inflation rate is primarily due to rising food
prices. The year-on-year change in the Consumer Price Index (CPI) in
February 2008 was 6.3 percent but among the various CPI components, the
most significant price increase was recorded for food stuffs, which
reached 19.5 percent in February 2008. Food groups with the most
remarkable increase include pork (56%), beef (49%), rice (23.4%),
poultry (19.1%), fresh vegetables (32.7%), edible oils (20.8%) and eggs
(18.2%). In addition, Hong Kong's inflation is also fuelled by a host of
internal factors including strong domestic demand, a weakening currency
is tied to the U.S. Dollar, domestic rising wages and rentals.

The annual statistics, as stark as they are, mask the fact that most of
the price increases have taken place in recent months. Retail food
prices between January and February 2008 alone rose 6.4 percent,
accounting for one-third of the annual increase.

Hong Kong is roughly 95% dependent on imports for its food supplies.
With one of the largest per capita incomes in Asia, Hong Kong is not a
food aid recipient. To economize, some consumers are shifting their
consumption from fresh to frozen meats. Hong Kong has insignificant
farming and a relatively minor food processing industry. Though
transshipments inflate export statistics, Hong Kong is not a
food-supplying market. Also, it holds no food reserves as a means of
regulating prices. Apart from securing verbal commitments from Thailand
and Beijing to continue supplying rice, there has been no official
response to the current food inflation. That said, sources indicate
officials are concerned about the issue.

Despite the high inflation rate, Hong Kong is expected to maintain its
free trade policy. As Thai rice prices increased significantly, Hong
Kong traders began exploring opportunities to source from China. In
response to reduced live pig and pork supplies from China, Hong Kong
increased its pork purchases from other countries, such as the U.S.,
Brazil, Spain and Germany. Because the Hong Kong currency is pegged to
the U.S. Dollar, Hong Kong traders find it more price-attractive to
source products from the U.S. In 2007, U.S. exports to Hong Kong
increased 28 percent. Hong Kong, despite a small population of 7
million, is the 8^th^ largest market for U.S. consumer-ready products.

While officials expect acute food inflation to continue in 2008 as a
result of rising commodity prices and strong economic growth forecast at
4 to 5 percent, local economists forecast that the odds of run-away
inflation are low.

China is Hong Kong's leading food supplier, accounting for about 21
percent of Hong Kong's food imports. China has pledged full support for
Hong Kong's food supplies. However, there is no guarantee for food being
offered at stable prices. Given below are the price changes between
February 2007 -- February 2008. Some of the increase is due to the 15
percent appreciation of the RMB over the past year. The recent price
increases are well depicted in Table 3. Between January 2008 and
February 2008, the store-bought food prices already increased by 6.4
percent in just one month.

**Hong Kong's Inflation**

Table 1: Year-on-year CPI Changes

  -------------------------------------------- -------------- ------------
                                               Year-on-year   
                                               Change %       

  Section                                      **Prices       **Prices
                                               Compared       Compared
                                               between Feb    between 2006
                                               2007 and Feb   and 2008**
                                               2008**         

                                               (%)            (%)

  **Food, (excluding meals bought away from    **19.5**       **7.1**
  home)**                                                     

  **Non-food item**                                           

  Housing                                      9.2            2

  Electricity, gas and water                   7.4            -0.7

  Alcoholic drinks & tobacco                   0.9            -1.2

  Clothing and footwear                        0.6            4.1

  Durable goods                                -3.7           -4.7

  Miscellaneous goods                          4.1            2.5

  Transport                                    1.2            -0.1

  Miscellaneous services                       1.4            1.7

  **All items**                                **6.3**        **2**
  -------------------------------------------- -------------- ------------

Source: Hong Kong Census & Statistics Department

The table above depicts that Hong Kong's 2007 CPI (Consumer Price Index)
was 2 percent higher than 2006 while food prices alone increased by 7.1
percent. However, the February 2008 Year-on-year (yoy) food prices
jumped as high as 19.5 percent contributing significantly to the 6.3
percent increase of February CPI change compared to February 2007. Other
CPI components only indicated a single digit change rate. The figures,
thus, show that Hong Kong's prices for almost all products are rising in
2008 but the striking spikes are in foodstuffs.

With respect to Hong Kong consumers' food basket in February 2008, the
greatest price year-on-year changes were accounted by pork (56%), beef
(49%), poultry (19.1%), eggs (18.2%), edible oils (20.8%), vegetables
(32.7%) and rice (23.4%). From the table below, it is very discernible
that the driving force for the current food inflation highly
concentrates on meat products, with pork in particular.

Table 2: February Food Price Changes Compared to Preceding Year

  ------------------------------------------------ ----------------------
  **Group of Commodity/Service**                   **Food Prices Compared
                                                   between Feb 2007 and
                                                   Feb 2008**

                                                   **(%)**

                                                   

  **Food, excluding meals bought away from home**  **19.5**

                                                   

  Rice                                             23.4

  Other cereals and cereal preparations            10.2

  Bread, cakes, biscuits and puddings              8

  Salt-water fish                                  18.6

  Fresh-water fish                                 13

  Other fresh sea products                         14.5

  Processed sea products                           10.5

  Pork                                             56

  Beef                                             49

  Poultry                                          19.1

  Meat, frozen                                     17.8

  Meat, canned                                     31.6

  Meats, others                                    24.7

  Fresh vegetables                                 32.7

  Processed vegetables                             9.7

  Fresh fruit                                      8.5

  Process fruit                                    6.2

  Dairy products                                   6.2

  Eggs                                             18.2

  Edible oils                                      20.8

  Carbonated drinks                                2

  Other non-alcoholic beverages                    2.9

  Sugar                                            5.6

  Confectionery                                    5.6

  Flavorings and additives                         7.1

  Food, others                                     6.7
  ------------------------------------------------ ----------------------

Source: Hong Kong Census and Statistics Department

Table 3: February Food Price Changes Compared to Preceding Month

  ----------------------------------------------- -----------------------
  **Group of Commodity/Service**                  **Food Prices Compared
                                                  between Jan 2008 and
                                                  Feb 2008**

                                                  **(%)**

  **Food, excluding meals bought away from home** **6.4**

                                                  (annualized rate of
                                                  76.8%)

                                                  

  Rice                                            4

  Other cereals and cereal preparations           1.4

  Bread, cakes, biscuits and puddings             0.1

  Salt-water fish                                 12.2

  Fresh-water fish                                9.1

  Other fresh sea products                        18.1

  Processed sea products                          2.1

  Pork                                            9.1

  Beef                                            5.6

  Poultry                                         11.7

  Meat, frozen                                    0.4

  Meat, canned                                    1.8

  Meats, others                                   3.8

  Fresh vegetables                                15.9

  Processed vegetables                            1.3

  Fresh fruit                                     4.8

  Process fruit                                   0.2

  Dairy products                                  0.3

  Eggs                                            3.8

  Edible oils                                     2.5

  Carbonated drinks                               0.1

  Other non-alcoholic beverages                   0.3

  Sugar                                           0.1

  Confectionery                                   1.1

  Flavorings and additives                        1.9

  Food, others                                    2.1
  ----------------------------------------------- -----------------------

Source: Hong Kong Census and Statistics Department