Today, another defence of the peg. A frequently quoted argument for why the link to the US dollar should go is that inflation in Hong Kong has consistently been so much higher than in the United States as to put ever-mounting strain on the linkage. The superficial facts are undeniable. As the first chart shows, Hong Kong's inflation rate over the past 10 years has been an average of 5 per cent higher than the US consumer inflation rate. In fact, if it were inflation differences alone that determined exchange rates, then the current exchange rate would be more than HK$12 to US$1 instead of the HK$7.80 peg. But stop there. The inflation difference with the US can have an impact on the exchange rate only in those elements of the consumer basket that can readily be shipped back and forth to the US. If something is traded only within Hong Kong and only in HK dollars, how can it possibly affect the currency? It never touches the foreign exchange market. Just such a thing is a hefty element of the consumer basket in Hong Kong. You cannot cut your flat out of your building, heave it over to the docks, put it on a ship to the US and slide it into another building in San Francisco. Hong Kong housing is fixed in Hong Kong and is traded only in HK dollars. And housing consistently shows the highest inflation rate of all the CPI components. The latest figures show it still running at almost 8 per cent, despite the slump in the property market. This is what keeps inflation in Hong Kong so much higher than in the US. Now take the case of something that is easily traded across borders. If the price of the stereo you want is a third higher in Hong Kong than in the US, you can buy it by mail order from the US. You won't even have to go to that trouble. Some bright spark will have seen the opportunity before you and got into the import-export business to make it available to you at your nearest electronics shop. And what do you see as the inflation trend in this component of the CPI? Just what you would expect. As my second chart shows, inflation in consumer durables has long been in line with the US inflation rate. In fact, over the past 10 years, it has been less than US inflation and it is less at present by a margin of 1.2 per cent. Roughly the same is true of import and export prices and of manufacturing producer prices, which actually count for more if you are looking at pressure on exchange rates. All of this is inevitable with a currency board system such as Hong Kong practices. It inexorably forces us into line with the US. So I simply don't buy the argument that inflation pressures are a reason to drop the peg. Where inflation is higher, it exerts no pressure, and where it exerts pressure it is no higher.