PIMCO's Bill Gross joined the chorus of people who believe that inflation is understated (or, at least that CPI type indices understate the true rate of inflation). Mr Gross stated that the US CPI numbers probably understated the true rate of inflation by about 1%. Leaving aside the technical point that "inflation" is a measure of increase in the money supply rather than a measure of the rate of increase in the price of goods and services, the evidence seems very clear.
In Hong Kong, the most recently released figures show annualised inflation at 5.4%. Basic necessities have been the biggest contributors to this figure (food, utilities and housing). The few things that I can point to which have decreased are rates (i.e. property taxes) and wine which declined or were relatively flat due to tax reductions or waivers by the government or consumer electronics. The true rate of inflation can only be guessed at but to illustrate the point that the CPI index understates the true rate of inflation, the most recent adjustment for jewellery can be used. In the 2007 adjustment to the CPI weighted basket, the percentage of household income spent on jewellery was slashed to a fraction of the figure used in 2003. Given that the economy was booming in 2007 and was in recession in 2003, the reverse should have been true.
In an environment where deposits earn next to nothing and dividend yields on the local stock index are around 3%, 5.4% inflation is high and a serious threat to both personal savings and standards of living. The fact that the real rate is higher still is scary.
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