Editorial : The threat of stagflation must not be underestimated

【明報專訊】This year's iBond, an inflation-indexed bond, will become available for subscription next month. Though the government will increase the issuance size, market participants are optimistic about its reception. This highlights many investors' and citizens' concern about the risk of rising global inflation. Recently, Brazil has been under the pressure of stagflation, and in the shadow of recession, its central bank has had to raise interest rates to curb inflation, which is a warning signal to the world.

Having contracted for six consecutive quarters, Hong Kong's economy rebounded only in the first quarter of this year by growing 7.8% year-on-year. The growth rate has exceeded market expectations by a wide margin. Some major banks have also drastically raised Hong Kong's growth forecast for the entire year from 4.6% to 9.2%. Ordinary citizens, however, do not seem to feel much improvement in their living standards. The pandemic has worsened the disparity between the rich and the poor. Although the pandemic in Hong Kong has eased off, the economic recovery is uneven. In the first quarter, economic growth was mainly driven by exports, and consumption remained weak. Furthermore, the spectre of global inflation has risen suddenly, and its impact on Hong Kong is unclear. If one is blindly optimistic and underestimates the risks, one could get one's fingers burnt.

In the fourth quarter of last year, Hong Kong reported an inflation rate of minus 0.3% year-on-year, which rose to 0.9% merely in the first quarter of this year. On the surface, there does not seem to be much inflationary pressure. However, if we put aside factors such as falling private housing rents, citizens' expenditures have actually increased on water, electricity and gas supplies. In recent months, bus fares have risen significantly. MTR fares have not been lowered, so in effect they have risen as well. The public is gradually feeling the pressure of rising prices. Hong Kong is a small economy. If inflation outside Hong Kong rises significantly, the city could face rapidly rising inflation pressure from imported goods. The Hong Kong government believes that local price pressures will "maintain moderate in the short term". Looking ahead at the years between 2022 and 2025, the local inflation rate will be about 2%. Some major banks predict that in the third quarter of this year, local inflation may rise to a high of 4% year-on-year before falling gradually. If economic growth resumes, a 2% inflation is a tolerable level. The question is whether things will develop in a different way, leading to a "black swan" scenario of high inflation.

When vaccines were rolled out late last year, markets expected developed countries to recover. Over the past half year, commodity prices have kept rising. The rise in the price of copper, which is closely related to production, has been particularly remarkable. Three-month copper prices have recently surged past the previous high of 10 years ago and are now in record levels. Economic recovery in the US has accelerated in recent months, with the growth rate reaching 6.4% year-on-year in the first quarter. But inflation has also increased significantly. The US Consumer Price Index (CPI) in April increased by 4.2% year-on-year, the largest increase in more than 12 years and much higher than market expectations. All the indications are that producers are beginning to pass on the costs of rising commodities and wages to consumers.

With the spectre of inflation rising suddenly, global stock markets are also fluctuating. Hong Kong stocks are falling repeatedly. Therefore, it is not surprising that many people intend to purchase the iBond. However, those who can benefit from it will be limited to people with money to spare rather than the masses. Although there are some relief measures for the grassroots in this year's Budget and the electronic consumer vouchers will be distributed later, we have to wait and see how much they actually help. The authorities need to pay close attention to the external economic circumstances, play out all possible scenarios, and come up with countermeasures as soon as possible.

明報社評2021.05.14:通脹壓力蓄勢待發 滯脹風險不容低估








get your fingers burnt : to suffer as a result of doing sth without realising the possible bad results, esp. in business

play out : If you play out a situation, you pretend that it is really happening

scenario : a description of how things might happen in the future

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