Deflation

With the benefit of three more months of figures, there is growing evidence that deflation in Hong Kong ended in the third quarter of last year.

On 29 January 2004 I drew attention in this column to the possibility that deflation in Hong Kong may have ended. In that article I also commented on the presentation of our monthly figures on consumer prices by the Census and Statistics Department and the interpretation of those figures by reporters and analysts. I have always thought that the turning points in economic trends, when opportunities present themselves and risk profiles change, are very important for participants in financial markets and regulators. The early identification of these turning points is a task that we all should pay special attention to, whether we are in the business of the maximisation of opportunities or the management of risks.

A common definition of deflation is "reduction in the general level of prices in an economy". In Hong Kong, the measure of this general level of prices that everyone looks at is the Composite Consumer Price Index (CCPI). Our task at hand is to identify when the general level of prices, as measured by the CCPI, has stopped falling. We continue to hear in recent months, when the CPI figures are published every month, press comments that deflation has continued in Hong Kong, perhaps at a slower rate. These comments gave the very clear impression that the general price level has continued to fall in recent months. And on the occasion of the publication of the March figures the title of the press article in one of our newspapers reads: "deflation persists, and pace picks up again in March", meaning, I suppose, that the fall in the general price level has gathered pace again in March.

So what about the comment I made in my Viewpoint article published on 29 January that "deflation in Hong Kong may have ended"? Well, one thing for sure is that I am not taking it back. With the benefit of figures for another three months since, let me be a little more definite and say that deflation in Hong Kong ended in the third quarter of last year, in that the general level of prices, as measured by the CCPI, stopped falling then.

It is true that, for example, the CCPI in March this year just published is 2.1% lower than that in March 2003. But what actually happened, if you look closely at the level of the Index, is that prices have continued to fall from March 2003 through the second quarter of the year but bottomed out in the third quarter. Prices seem to have increased somewhat since then, although it is probably too early to say whether a trend of increasing prices has yet developed. Over the six-month period ending January this year (comparing the CCPI of January 2004 with that of July 2003), prices have increased, by (a moderate but statistically significant) 1.4%. However, the seasonal effect of the Lunar New Year in January and the subsequent moderating effect of the one-off rebate by an electricity company in February and March have trimmed the increase. If prices remain stable in the coming months, the year-on-year percentage change of the CCPI will likely be positive by July this year. Perhaps it will be then (August this year when the July figures are published) that deflation will be widely considered to be over.

The monthly CCPI numbers are reproduced here for readers' reference.

Joseph Yam

20 May 2004

Related Viewpoint Article:

• Deflation, 29 January 2004

Click here for previous articles in this column.

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