The year 2013 has officially set in. For many, New Year is the time for parties and celebration. Yet, welcoming a new year in Hong Kong also means higher living costs. For example, power tariffs and tunnel tolls are scheduled to increase. Many critics say that the price hikes of public utilities will lead to higher inflation.

Strictly speaking these critics are correct. Inflation is the measure of price changes with reference to a basket of consumption, which is broadly defined as including virtually every item in the basket directly or indirectly. In today's world, every good and service is closely related, and theoretically any price increase from whatever source will push up the price of other products, hence leading to higher inflation. From this perspective, these critics are always correct. However, technically speaking, the price change of electricity or toll charges will have only a minimal impact on inflation.

If we look at the composition of inflation in Hong Kong, there is a 2.5 percent weight allocated to electricity, fuel and water, but it does not cover only power. Even though there is a 10 percent electricity cost increase, and another 10 percent rise in cost of fuel and water, the inflation impact will only be 0.25 percent. As the government has not increased the water tariff for some time, therefore, the power tariff increase impact will be even smaller. So it is logical to conclude that the electricity tariff rise will not have substantial impact on inflation. Yet, when people receive the electricity bill, they will observe the power price has increased. This is indeed a strategy used by the power companies in neutralizing the opposition to their price increase. Very often the power companies will indicate that the power tariff rise will have immaterial impact on inflation.

The main point here is that both the critics and the service providers are correct in their views, but a layman may or may not understand the technical issues of inflation.To a normal citizen, he only feels the diminishing purchasing power of his salary.

The government understands the situation and has to a certain extent introduced some measures to lower inflation. The housing cost is the largest component of inflation in Hong Kong and its current weight in the consumption basket is over 30 percent. If housing cost does not increase, then inflation will also be kept at a low figure. In the past, the government offered rental relief to the public housing estates' tenants, as well as concession rates. These tactics keep housing costs lower, and it makes a material impact on inflation.

Nevertheless, the majority of citizens will not understand the technical details of inflation, nor will they examine the inflation figures closely. They will just look at the headline figures and make comments about the perceived impact of rising living costs.

In 2013, with continual quantitative easing monetary policies adopted by the US, the European Union and Japan, the inflation risk is much higher. Inflation will remain to be a major concern, and surely the government needs to do something to keep the inflation figure down. The forthcoming Policy Address and Budget Speech will indicate how the government will tackle the problem of rising prices. This is not just an issue of people's livelihood. If properly handled, they can win the much needed support from the people. I hope that the government will have enough ammunition for this purpose.

The author is dean, School of Business, Hang Seng Management College. The views expressed here are entirely his own.

(HK Edition 01/03/2013 page2)