TNAG-0735-FCO40-939-Policy-objective-for-the-developing-of-Hong-Kong-in-the-1980-1978 — Page 76

terms has been of limited significance so far (in contrast to

the severe price inflation of 1973-74 (5)). As the world supply

position of primary commodities (including foodstuffs) has kept

prices on world markets generally lower in 1978 than in 1977,

the effect of the depreciation of the Hong Kong dollar on domestic prices has been offset to a quite significant extent.

This is not to say that the prices of many items (e.g. Mercedes

cars from Germany) have not increased, particularly those imported from strong currency countries.

(4)

13.

Incipient threat of inflation

But there is a very real threat that an inflationary situation is now developing in Hong Kong. This is due, first,

to the extent to which the adjustment mechanism has been

operating through the depreciation of the exchange rate;

secondly, to an imbalance between the supply of, and demand for,

real resources, particularly in certain sectors.

(a)

Depreciation of the Hong Kong dollar

and,

14.

Whereas the depreciation of the Hong Kong dollar we

have experienced in the past 20 months of between 18% and 19%

(6) has helped the export sector to improve its competitiveness, the domestic price increases we have so far experienced have been really very modest, particularly when it is realised that the import-weighted exchange rate index has depreciated faster

(5) Hong Kong Hansard, 1973, pages 231 - 247.

(6)

Trade-weighted effective exchange rate index (18th December 1971 = 100):

16th March 1977

115.5

10th November 1978

94.1

7

/than