Headline CPI could ease slightly to 3.5% y/y

Meanwhile, imported price pressures could remain sticky.

The headline CPI is expected to ease a bit to 3.5%y/y in 2014.

According to a research note from UBS, there are two major drivers of Hong Kong’s inflation.

First, imported price pressures, driven by Chinese inflation and global commodity prices. On balance, imported price pressures could remain sticky.

The second factor is housing rental inflation, which UBS views as a direct pass through from residential property price increase.

Rental inflation should nevertheless slow more visibly and drive the bulk of the easing in headline inflation in 2H14, if property prices adjust 20-25% from the peak as per our house view.

Here's more from UBS:

What the numbers say: The headline CPI eased to 3.6%y/y in 2Q14. We expect the CPI to ease more visibly in 2H14, as slowing rental inflation starts to filter through.

What they mean: In most economies investors watch inflation to assess the risk of shifts in monetary policy.

However, Hong Kong has no domestic monetary policy due to its commitment to the pegged exchange rate, rather it imports the US Fed’s monetary policy regardless of local inflation.

But inflation is still very important to track, because Hong Kong occasionally experiences persistent, negative real interest rates that over-stimulate the domestic economy.