Hong Kong's headline consumer price index rose 2.5 percent on the year in August, as it did in July. The index was flat on the month after rising 1.0 percent previously. Excluding the impact of one-off government measures, Hong Kong's underlying inflation rate was also unchanged at 1.2 percent. Officials expressed confidence that inflation will remain"mild" in the near-term.

The Consumer Price Index (CPI) measures the changes over time in the price level of consumer goods and services generally purchased by households. Different series of CPIs are compiled by to reflect the impact of consumer price changes on households in different expenditure ranges. Headline CPI is based on the overall expenditure pattern of all households taken together to reflect the impact of consumer price changes on the household sector as a whole.

The set of expenditure weights used in the CPI is updated once every 5 years to ensure that up-to-date expenditure patterns of households in different expenditure ranges are used in the compilation of the CPI. This practice conforms to international practices and is considered adequate for maintaining accuracy of the CPI. Currently, the delineation of the CPIs is based on the expenditure patterns derived from the 2014/15 Household Expenditure Survey (HES) conducted during the 12-month period from October 2014 to September 2015.

The price index for each individual commodity or service item for the month concerned, which reflects the price change of the item since the base period, is first obtained. This is done by comparing its price in that month to the price in the base period. The CPI for the month is then obtained by aggregating the products of the price index of each item for that month with the respective weight.

The change in the CPI is an important indicator of inflation affecting households. The CPI is also used in the private sector as a reference in adjusting salaries, wages or charges so as to maintain the purchasing power of the currency in the face of changing prices. When the CPI rises, people have to pay more for the same fixed basket of goods and services. In other words, people can generally buy less goods and services if the expenditure remains the same. On the other hand, people can generally buy more with the same amount of expenditure when prices fall.

The year-on-year rate of change is commonly used when analyzing changes in the CPI. By comparing with the CPI in the same period a year ago, the effect of most seasonal variations in prices can be removed without referring to the seasonally adjusted series. However, it should be noted that some holiday effects may fall in different months of the year (e.g. the Chinese New Year may be in January of a year and in February the following year). In such a case, the year-on-year rate of change is subject to the influence of the holiday effect.

An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.

Inflation (along with various other risks) basically explains how interest rates are set on everything from mortgages and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.