13.
The essence of our system is that adjustments do not take place through the exchange rate itself, but through changes in other aspects of the economy, a process which may include changes in the rate of inflation. Our recent inflation rate
crept up over the course of 1987, but remains fairly moderate by historical standards (6). In the fourth quarter of 1987, the
Consumer Price Index (A) was 6.7% higher than a year earlier,
while for 1987 as a whole the average annual increase was
5.5%.
Some of the inflation was imported, partly reflecting the
weakening of the Hong Kong dollar against most other major currencies, and some arose from the high liquidity and pressure of demand within the economy.
14.
With the economy operating at full capacity, labour
shortages became widespread in 1987.
In response, local
producers have displayed a remarkable degree of flexibility and ingenuity in increasing productivity. They have also made significantly more use of outward processing facilities in China. This increased inter-relationship of our that of China was a marked feature of last year and seems likely
economy with
to continue this
this year. There are benefits for all in the development of this relationship.
(6)
Rate of increase of consumer prices over the past decade:
Rate of Increase of CPI(A) (8)
1978
5.9
1983
9.9
1979
11.6
1984
8.1
1980
15.5
1985
3.2
1981
15.4
1986
2.8
1982
10.5
1987
5.5
Average 8.7%
/15. The
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