[CONFIDENTIAL].
unexpected downturn I should expect this pressure. steadily to mitigate the present situation, though this will only be possible within the realities of the financial positions of the firms concerned. In other words progress is likely to be different in different firms and in different sectors until increased demand for exports and increased local development and other factors produce a tighter labour market and finally redress tho balance and enable the former progress to be resumed. Meanwhile one can take some encouragement from a small drop of 1.1% in the cost of living index for April. Unless there is some further turn of the screw from the oil producers food prices may now have either peaked or be near their peak.
5.
The present situation places the Communist hierarchy in a dilemma. On the one hand they see in inflation a good issue on which to base united front tactics, extend the influence and membership of the Communist-controlled unions and discredit the Hong Kong Government. On the other hand the awkward fact is that much of inflation in Hong Kong; resulta from the higher prices of Chinese goods. However they have been conducting a vigorous campaign of critising the Hong Kong Government for being primarily responsible for inflation through its policy of the thrệo highs' high land prices, high taxation and high renta. Through our own mennni we have made thes point that this in a rimoke nereen to cover the high prices of Chinese products. Comments and counter- comments have not been wanting from many sources. It is a confused situation which lends itself to exaggeration, misrepresentation and panic advice. is one in which it behoves the Government at least to keep its head.
6.
Tt
In this situation there are certain thậngt the Government murit do:
a)
It must have sufficient up-to-date statistics and other indicators to make a sound assessment of the social impact of inflation and wage levels each month,
or over-reaction to interested pressures. A special group has been set up to do this.
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CONFIDENTIAL
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