It's time to worry about inflation. Sure, Europe still looks wobbly, the US has seen a few false starts before and even China, Asia's economic engine, continues to sputter. But get ready for price pressures to resurface. First, there is oil. Second, liquidity is pouring back into Asia. Third, cost pressures continue to bubble away under the surface. It will take little to tickle inflation back to life - so, let's not be complacent. Hong Kong, too, will be swept up in this.
Inflation across the region is a bigger risk than markets seem to believe. Here is a way to think about it. Asia has seen a cyclical deceleration of inflation over recent months, giving investors and policymakers false comfort.
But, structurally, price pressures are still elevated: after years of strong growth, the region is bumping against its output potential.
Even the slowdown in growth over the second half of last year has thus taken off the pressure only temporarily. In Hong Kong, after all, prices still rose over 6per cent in January compared to the previous year. There are no gaping output gaps here.
Even a slight acceleration in demand, therefore, will lead to a rapid response in consumer price index readings. In fact, research shows that the trade-off between growth and inflation has deteriorated in Asia over the past decade. This means that, for a given level of growth, inflation is now higher than, say, six or seven years ago.
Crucially, however, this also implies that, for a given acceleration of growth, inflation snaps back more quickly today than we've become accustomed to.
The reasons for this are structural. Demographics are becoming slowly, but perceptibly, more challenging. This puts upward pressure on wage costs.
