The alarming surge in the latest inflation figures has awakened Hong Kong people to the brutal reality: the value of your hard earned money has been and continues to be eroded by surging consumer prices. 

Headline CPI jumped 7.9 percent in July from a year ago, a 15-year high, while the underlying inflation rate rose to 5.8 percent, a three-year high, according to the latest official data released on Aug 22. 

Taking things at face value, private housing rents and food prices are mainly to be blamed for the staggering inflationary pressure Hong Kong people face. 

This could be easily explained by the fact that Hong Kong residents' expenditure on housing and food accounts for 31.66 percent and 27.45 percent of the weight of the CPI basket respectively, according to data from the Census and Statistics Department. 

But what are the underlying driving forces behind the surge in private housing rents and food prices? Well, while the supply/demand balance plays a major role in the price formation according to basic economic principles, the continuous depreciation of the Hong Kong dollar - as a result of its peg to the US dollar -is contributing significantly to the inflationary pressure in terms of imported inflation and asset prices. This is particularly the case for property prices, which is also resulting in higher rents. 

Imported inflation is underpinned by the fact that the city sources many of its daily consumer goods, particularly food stuff, from the mainland. Meanwhile, the undervalued local currency makes Hong Kong properties attractive to overseas buyers, particularly mainland investors, who have helped push up local home prices. 

So how much is the Hong Kong dollar being undervalued? While an accurate estimate is by no means possible, a glimpse into the movement of some currencies in the region, particularly the yuan, will give us a clear idea about the extent of undervaluation of the Hong Kong dollar. 

The yuan has appreciated by around 21 percent versus the US dollar since the People's Bank of China scrapped the yuan's peg to the US dollar in July 2005, allowing for the gradual appreciation of the mainland's currency against a basket of currencies. Over the same period, the Singaporean dollar climbed about 29 percent against the greenback (see figures). 

Considering the fact that the Hong Kong economy is a proxy of the mainland economy and is comparable with Singapore's economy, I think it is reasonable to expect the Hong Kong dollar to appreciate against the US dollar at a pace similar to that of the yuan and the Singaporean dollar. 

What is more mind-boggling is the highly likely odds that the Hong Kong dollar will continue to slide, dragged down by the US dollar if the US Federal Reserve takes further monetary quantitative easing (QE) measures in a bid to fence off a double-dip recession, as many market analysts anticipate it will do. 

For many Hong Kong residents, converting their spare Hong Kong dollars into yuan to fight imported inflation is a practical way out. This trend is widely expected to continue for the foreseeable future as the central government lets the yuan appreciate. 

But they will realize that they will miss out on a chance to reap at least a 20 percent revaluation gain from their Hong Kong dollar holdings if and when the Hong Kong Monetary Authority decides to de-peg the local currency and let it appreciate to head off unbearable imported inflationary pressure. What a dilemma! 

The author is a staff writer at China Daily. The opinion here is his own. 

george@chinadailyhk.com