Inflation : new risks for the Hong Kong economy

In this chapter, I would argue that Hong Kong’s recent inflation is of the “cost-push” category, that it is to a degree self-inflicted, and moreover, that it is triggering a structural adjustment that will have long-term implications on the Hong Kong society. I would urge that the Hong Kong government should make a strong effort to hold back inflation, even if this means a temporary running down of our fiscal reserves. Section II will describe how inflation has evolved over the 1991 to 1995 period. Section III argues that demand-pull inflation, under the linked exchange rate regime, will not cause serious problems for Hong Kong. Section IV explains how cost-push inflation under the linked exchange rate regime will hurt Hong Kong’s economy. Section V discusses the outlook for inflation and what the Hong Kong government may do under the current circumstances. In the Appendix, I will address a technical point about inflation, expectations, and collective bargaining.