Monetary Authority Chief Executive Joseph Yam expects the underlying inflation rate to rise in the coming months.

In his weekly Viewpoint column published today Mr Yam said there is a gap between the headline inflation rate and consumer impression because of special government tax-relief measures, particularly the property rates rebate.

While the headline inflation rate measured by the year-on-year rate of increase was 1.6% in September, the underlying inflation rate after adjusting for the special effect reached 2.7%, he said.

"Consumer prices have indeed been increasing faster than the rate suggested by the headline numbers."

Rates relief temporary

Given the temporary nature of the rates relief measure, Mr Yam said a spike in the headline inflation rate is expected when its temporary statistical effect wears off.

"Even if the rebate were re-introduced, the spike would only be postponed and the headline inflation rate would still move closer to the underlying inflation rate."

Mr Yam estimated the spike will be around one percentage point and will happen in the second quarter of 2008, assuming the rates relief measure is not repeated in the next financial year.

He said many factors explain the faster inflationary rate now in Hong Kong, like the buoyant economy, labour market tightness, a weaker US dollar, continuing renminbi appreciation, rising global food prices, and the gradual pass-through of increases in property prices to residential rents.

Current indications are this rising momentum of underlying inflation is likely to continue, Mr Yam added.