Animal Farm | 2019: Macao inflation will be lower!

Albano Martins

The rate of inflation gives us a rough idea of the loss in our purchasing power. It is risky to trust these indicators too much as translating averages do not really reflect the state of our purchasing power.

My first article on inflation written in the 1990s was called “A basket that smells old.”

At the time, I pulled apart the entire process of calculating inflation and explained how a sample of expenditures was used, collected well over ten years ago, full of products that no longer existed or did not already translate the true weight of family consumer spending.

That was how it was done then. And everything has been changed! The article stirred something up!

During the golden age of the real estate bubble, I repeatedly criticized an inflation indicator that showed the values of rents going down as housing prices increase.

Of course, there is always a “lag” in this relationship, but the correlation is always positive. That is, when the value of houses increases in general, the value of rents accompanies this movement, because rent is no more than the interest on the capital (the value of the house) applied in the real estate market, at a rate of remuneration that compensates for the loss of liquidity. That is, this rate of interest must be much higher than the interest rate that applies to a term deposit!

Now, if the capital value (the value of the house) goes up, even if the interest rate is maintained, the rent must rise as well.

In Macao, only a short time ago this phenomenon began to change in inflation statistics.

Despite increases in the value of homes, rents fell, pulling down inflation because these costs comprised about 20 percent of family expenses! And that decline continued until April 2018, to which point real estate prices had been reaching colossal values for many years!

The inflation indicator completely distorted the erosion of purchasing power in Macau, due to the weight of the rents in the shopping basket of homeless people!

I was saying in an article earlier this month that “in January, February and March inflation was at 3.11, 3.09 and 3.10 percentage points! Today (…), I still believe that everything leads one to believe that the economy will continue to slow and this includes inflation as well. Inflation figures for April will only be officially known on May 21 or 22, but I predict it will be around 3.08 or a maximum of 3.09 percentage points on that downward path!”

What were the figures from DSEC published few days ago? 3.09 percentage points!

And what will they be in May?

At the end of January I said: “(…) last year Macau’s official inflation was around 3.01 percent and by 2019 it should be 2.93 percentage points … for me, the CPI will grow less, but who doesn’t know may think that this will happen in the first months of the year. No, in those first months we should still see inflation grow … and only after May will we begin to see inflation begin to fall.”

And then for May, what will be the inflation measured by the average variation over the last twelve months? It will be 3.07 percent!

Look at that fall I was referring to. Year-on-year changes in May will be 2.67 or at most 2.76 percentage points.

Conclusion, I can assure you, inflation at the end of the year will be much lower than the 3.01 percentage points of last year!