Download Reasons of Inflation

Inflation and Deflation in
Hong Kong in the past ten
years
Group1
Lau Hon Wa(Group Leader) (053034)
Ng Kwun Hwa(053033)
Chau Kwok On(053038)
Luk Juvenia(053049)
Shiu Cheuk Pan(053063)
Reasons of Inflation
1. Demand Pull Inflation
2. Cost Pull Inflation
The reasons for the inflation in HK
from 1990-1997



Structural transformation key
relocation of HK manufacturing
activities to China
led to a significant increase in
business opportunities for HK
The reasons for the inflation in HK
from 1990-1997


Imported inflation
It has been argued that HK
suffers from imported inflation
due to the Linked Exchange Rate
System.
The reasons for the inflation in HK
from 1990-1997



Housing Costs
when there is an inflation, people
forecast the housing price will be
increased in the future
pushes up the property price and the
rental price as well.
The reasons for the inflation in HK
from 1990-1997


Growth in government spending
Government expenditure was grew in
the 80s, it increased the expenditure
in the public sector, thus the inflation
existed.
Ways to curb inflation
1.
To raise the interest rate
1.1  public save more money  public have less
current money  purchasing power decreases  price
falls
1.2  expenses when borrowing money will increase
 purchasing power decreases  price falls
Ways to curb inflation
2.
To increase the income tax
 public’s expenses increase  their burden
increases  they will spend less  quantity
demanded decreases  price will decrease
S
P1
P2
D1
D2
Ways to curb inflation
3.
To decrease the sales tax
 decrease the cost of goods  the supplies
can set the price lower  price lower
S1
S2
P1
P2
D
Ways to curb inflation
4.
To issue government bonds
 the current cash in the public’s hand will
decrease  the public can buy less  quantity
demanded will decrease  price falls
The factor of deflation in the
world:
1.
Most of the countries in the
world have done many works
on combating inflation and
they are success.
2.
Technology improves quickly
3.
We can find the information
about the equilibrium price of
the world easier and also find
more substitutes.
20
%
10
0
-10
1996
1997
1998
1999
2000
2001
-20
year
private consumption
domestic capital formation
government consumption
GDP in Hong Kong is made up of
60%C
30% I
10% G



decrease of the aggregate demand
inadequate money supply
imported deflation
Decrease in aggregate demand comprises three
parts.



The burst of asset bubbles
shrink of stock market
labour market
Imported deflation
import goods price level index
import goods price level index
2000=100(base year)
110
105
100
95
90
85
1997
1998
1999year2000
2001
2002
the nominal rate of interest was at a
lower level. The reduced money
supply increased the real rate of
interest so we have deflation.
Nominal rate of interest = real rate of interest +
Anticipated
inflation rate
measures to combat deflation:
1.
decrease the interest rate by
purchasing government bonds
R decrease
=> I increase
=> Y increase
2.A well-timed tax cut
increase the disposal incomes
increase in consumption
3.High government spending


production of the economy would be
boosted
relieve the unemployment
4.structural reforms



increasing flexibility in factor markets
facilitate the reallocation of resources
allow for a more rapid disposal of
bad assets
5. Measures aimed at
promoting deeper and more
liquid capital markets.
case of Hong Kong:



1. Individual Visit Scheme
boosted retail, tourists and
restaurant industries and the
turnover of consumer durables and
luxury goods
such as electric appliances,
cosmetics, watches, gold and jewelry
and etc.
2. The quick reversal of deflation to
inflation in the Mainland




poor harvest and grain price increase
as well as the shortage of certain raw
materials
Since September of 2005, the CPI of
China substantially increase
inflation mainly driven by grain price
increase in the Mainland
=>price increases in certain good in
Hong Kong
3. steady softening of the US dollar
and resultant prices increase of the
imported goods


Beginning in 2001, Hong Kong dollar
index has been plunging along with
depreciation of the US dollar from
138.9 in 2001 to 98.9 at present,
dropping by 28.7%
=>slowed the declining trend of
Hong Kong’s general price level
Composite Consumer Price Index
110.0
107.5
104.5
105.0
CPI
99.4
98.8
100.0
95.0
103.2
97.8
94.8
92.9
92.4 92.0 93.0
90.0
85.0
80.0
1995
1996
1997
1998
1999
2000
2001
Year(s)
2002
2003
2004
2005
Composite Consumer Price Index
Composite CPI yearly change percentage
+10.0
+8.0
Groth rate
+6.0
+4.0
+2.0
0.0
-2.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-4.0
-6.0
Year(s)
Composite Consumer Price Index
Groth rate
Change in Inflation rate VS change in
GDP at constant market prices (2000)
12
10
8
6
4
2
0
-2
-4
-6
-8
1995
1996
1997
1998
1999
2000
Year(s)
2001
2002
2003
2004
2005
Inflation groth rate
GDP groth rate
Change in inflation rate VS change in
umemployment groth rate
10
8
Groth rate
6
4
2
0
-2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-4
-6
Year(s)
Inflation groth rate
umemployment groth rate
Change in inflation rate VS change in
the best lending rate
12
10
Groth rate
8
6
4
2
0
-2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-4
-6
Year(s)
Inflation rates
the best lending rate
THE END