Experts play down threat of stagflation

PUBLISHED : Wednesday, 23 January, 2008, 12:00am
UPDATED : Wednesday, 23 January, 2008, 12:00am

Economists have played down concerns that Hong Kong may be facing stagflation as inflation gathers pace and fears of a recession in the United States grow.

Uncertainty over the health of the US economy has rattled global stock markets and Hong Kong consumer prices have been rising, though the full impact of that has not been reflected in the 'headline' inflation figure because of the effect of the government's waiving of property rates.

The full-year rise in the consumer price index last year was 2 per cent; without the government measures, the figure would have been 2.8 per cent. The index last month was up 3.8 per cent year on year - the highest for nine years - compared with 3.4 per cent in November. Rising rents and food prices were mainly responsible for last year's inflation.

'Growth of between 6 per cent and 7 per cent and 2 per cent inflation is nothing like stagflation,' Hong Kong General Chamber of Commerce chief economist David O'Rear said. 'What we are more likely to see happen is, as growth in the US slows down, there will be less demand and inflation will fall.'

HSBC economist George Leung Siu-kay expects full-year inflation of 3.9 per cent this year, though that figure could change if the government announces more relief measures next month.

The term stagflation was first used to describe the combination of slow economic growth and rising prices in the 1970s, when the Organisation of Petroleum Exporting Countries raised crude oil prices fourfold.

Stagflation is difficult to control, as government measures designed to stimulate economic growth, such as tax cuts, exacerbate inflation, while measures to rein in inflation tend to keep an economy stagnating.