CONFIDENTIAL
3.
In the twelve months to March this year the consumer price index increased by 23%, and the foodstuffs component by 29%, the latter included increases in the import price of rice and flour of 107% and 70% respectively. As against these increases in the cost of living the index of industrial wages rose by 9% over the same period. The implications are obvious, the practical social effects certainly require very careful watching. As an annex to this despatch I attach a note on the social impact of this situation, prepared by a specialist group. It paints a picture of a population carrying on well in a situation which is not as easy as it has been accustomed to, but stops far short of real want, let alone crisis or social disorder. The real danger lies in any significant increase in unemployment. Though there is some under-employment, there is still no sign of significant unemployment.
4.
The rectification of the discrepancy between wages and cost of living lies in a rise in wages, insofar as this is consistent with the viability of industry. There is no question of wages remaining static. The Government, for instance, will announce a pay increase, ranging from 22% at the bottom to 12% at the top end of the Master Pay Scale, at the end of June. The major utilities will follow suit. The award is in line with similar increases recently negotiated in 20 leading firms. This will give impetus to union and non-union pressure already being exerted for increases. Always assuming there is no 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 the 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 results from the higher prices of Chinese goods. However, they have been conducting a vigorous campaign of criticising the Hong Kong Government for being primarily responsible for inflation through its policy of 'the three highs' - high land prices, high taxation and high rents. Through our own means we have made the point that this is a smoke-screen 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. It is one in which it behoves the Government at least to keep its head.
6.
In this situation there are certain things the Government must 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, and
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CONFIDENTIAL
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