ENG-2007 — Page 99

The Economy 1 59

The underlying consumer price inflation climbed up from 2.5 per cent and 2.4 per cent in the first and second quarters respectively to 2.7 per cent in the third quarter, and notably further to 3.5 per cent in the last quarter. The pick-up of the inflation rate in the second half of 2007, amid strong consumption demand, was mainly caused by surging food prices stemming from the global food inflation, appreciation of the renminbi and weakening of the US dollar. The resurgence of international oil prices from September 2007 and higher housing costs also contributed to the rise. Over the past year, inflation has become a concern. Yet the rate of consumer price inflation in Hong Kong in the fourth quarter of 2007, at 3.5 per cent, was actually comparable to the situation in the relatively advanced economies. Specifically, it was similar to or lower than the corresponding rates in the US (4 per cent) and other Asian economies at a similar stage of economic development, like Singapore (4.1 per cent), Taiwan (4.5 per cent) and Korea (3.4 per cent). Thus the increased inflationary pressures facing Hong Kong in the latter part of 2007 were by and large part of a more worldwide phenomenon.

After declining marginally in 2006, the GDP deflator, a broad measure of overall changes in prices of the economy, rose moderately in 2007, by 3 per cent over a year earlier. This was mainly because the terms of trade, which has a prominent impact on the GDP deflator given the sheer size of trade in the Hong Kong economy, improved during the year as export prices rose slightly faster than import prices. Taking out the trade components, the domestic demand deflator picked up by 2.1 per cent on average in 2007. The increase was faster in the second half of the year, in line with the rising trend of consumer prices (Chart 16).

Chart 16

Main inflation indicators (year-on-year rate of change)

6

4

2

0

-2

-4

-6

Per cent

Composite CPI

GDP deflator

-8

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2003

2004

2005

Underlying inflationary pressure went up in 2007.

2006

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2007