ENG-2010 — Page 105

The Economy | 63

2010 as a whole, up from 1 per cent in 2009. This annual increase was relatively moderate, particularly when viewed against the strength of the economic upturn. However, underlying inflation turned more visible towards the latter part of the year, rising from 0.8 per cent year-on-year in the first quarter, to 1.5 per cent and 2 per cent respectively in the second and third quarters, and further to 2.6 per cent in the fourth quarter. (The figures quoted refer to the 2004/05-based series. The corresponding figures of underlying inflation for the fourth quarter and for 2010 as a whole are 2.4 per cent and 1.7 per cent by reference to the new 2009/10-based series).

As a broad measure of the overall change in prices in the economy, the GDP deflator rose by 0.9 per cent in 2010, in contrast to a decrease of 0.6 per cent in 2009. The rebound reflected a reversal to mild inflation from prior deflation in overall prices during the economic recovery. The domestic demand deflator went up by 2.4 per cent in 2010, after a decline of 1 per cent in 2009. On the other hand, the terms of trade deteriorated slightly by 0.8 per cent in 2010, as compared to the 0.2 per cent improvement in 2009 (Chart 17).

Chart 17

Main Inflation Indicators (year-on-year rate of change)

Per cent

8

6

4

2

GDP deflator

0

-2

Composite CPI

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

2006

2007

2008

2009

|

2010

Inflation went up progressively and turned more visible towards the latter part of 2010, along with higher import prices and the brisk expansion of the local economy.

Public Finance

Management of Public Finance

The principles underlying the Government's management of public finances are enshrined in the Basic Law, which stipulates that:

• The Hong Kong Special Administrative Region (HKSAR) shall have independent finances, and shall use its revenues exclusively for its own purposes.

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64 | The Economy