University Number: 2010010998
Essay title: Domestic factors drive inflation, not import prices
Inflation means “a persistent tendency for nominal prices to increase and it is measured by the proportional changes over time in some appropriate price index, commonly a consumer price index” (“inflation”, 2009) or in short, “the rise in general level of prices”(Alchian & Kessel, 1962, p.521). Since most of the goods in Hong Kong, especially food, are imported from the Mainland, the appreciation of the Renminbi will increase the import prices of those goods. Therefore, it is not extraordinary for local citizens to think that the increasing import prices due to currency appreciation is the main driving force for the inflation in Hong Kong happening since 2006. However, the contribution of import prices to inflation is not significant. The culprit for the inflation in Hong Kong is not the rising prices of imported goods from Mainland China; on the contrary, it is mainly owing to the rentals and asset prices in Hong Kong, which are indirectly triggered by the appreciation of the Renminbi.
Undoubtedly, the appreciation of the Renminbi will increase the import prices from Mainland China, but it does not affect the retail prices in Hong Kong to a great extent, since the portion of China’s imports is small. The figure published by the Census and Statistic Department (as cited in Fan, 2010, p. 2) indicates that the amount of retained imports from Mainland China is low when comparing to those from European countries or Asia countries like Japan, and is only slightly higher than that of Singapore and South Korea. It only accounts for 11.9% of the total retail imports. Due to this small percentage, its effect is insignificant.
In fact, the increasing imported prices do not appear to be the major source of a district’s inflation. For example, Singapore, which is a country similar to Hong Kong with the high dependence of imports, as an...