ENG-2018 — Page 86

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The Economy

rate was due to an increased ceiling for the government's rates concession from the second quarter of 2018. The quarterly figures, though sometimes distorted by temporary factors, showed that underlying inflation picked up visibly to 2.4 per cent in both the first and second quarters, and further to 2.8 per cent in the third quarter before stabilising at 2.9 per cent in the fourth quarter (chart 13).

Chart 13

6

5

+

3

Per cent

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

GDP deflator

Underlying Composite CPI

Q1

Q2 Q3 Q4 Q1

Q2 Q3 Q4 Q1

2014 I 2015

I

Q2 Q3 Q4 Q1

2016

Q2 Q3 Q4 Q1

2017

Q2 Q3 Q4

2018

Underlying inflation went up in 2018 as the economy recorded another year of above-trend growth.

Locally, earlier increases in fresh-letting residential rentals translated into a faster rise in the private housing rental component of consumer price inflation through 2018 until the final months. As for cost pressures, while wages and earnings sustained solid growth amid tight labour market conditions, labour costs on a unit cost basis were largely contained by a concurrent improvement in labour productivity. The rental cost pressure faced by businesses, though broadly moderate, intensified slightly amid the general uptrend in retail and office rentals. External price pressures also edged up. Imported inflation rose more visibly in the first half of 2018, reflecting robust global economic conditions, the depreciation of the Hong Kong dollar along with the US dollar on a year-on-year basis and, to a lesser extent, the increase in international oil prices. Nonetheless, the strengthening of the Hong Kong dollar along with the US dollar, together with the softening in international prices of food and commodity items amid moderating global growth, reined in further acceleration of imported inflation in the second half of the year.

The GDP deflator rose 3.6 per cent in 2018, higher than its 3.0 per cent increase in 2017. The terms of trade saw marginal improvement in 2018 as export prices rose slightly faster than import prices. With external trade components excluded, the domestic demand deflator rose

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