With all the doom and gloom being talked about the ever steeper deflation in consumer prices there is one question that ought to be asked more often. Just what goes in to the price of a shirt? Look at the first chart to see why it is such a key question. It shows the difference between Hong Kong and the United States in consumer prices for clothing from the beginning of 1984, three months after the Hong Kong dollar link to the US dollar had been put in place. What it tells you is that a shirt which would have cost $100 in both places at the beginning of that period would have costs $327 in Hong Kong by April, last year but only $130 in the US. Why should it have been that more expensive in Hong Kong? The exchange rate stayed the same throughout the period, both economies source their clothing imports from the same world market of sweatshops and their quality standards do not differ much. The Hong Kong retailer may have paid higher rents to his landlord but even so you would think one obvious way for him to make money would have been to buy his wares off department store shelves in the US and then resell them at home. His costs of doing it this way would still easily have been covered by that enormous margin in prices. Whether or not anyone ever tried it, all the figures on retail prices of clothes in Hong Kong relative to their costs indicate that for years someone was making a lot of money on the trade, be it the shopkeepers or their landlords. That is until the financial crisis truly broke over our heads early last year and reality struck home to consumers. At its worst a year ago the volume of retail sales in clothing and footwear dropped by 38 per cent year over year. The retailers then took the obvious step of cutting their prices drastically and, as the second chart shows, the obvious results are becoming evident. The buyers are returning and the crisis is easing. This deflation we have encountered is not really such a bad thing for us. It is not a deflation of the classic kind associated with a monetary crisis, not with money-supply growth rates rising again. Rather it is evidence that two years ago our prices were way out of line, most obviously in clothing and footwear but also in housing and many other areas. We are now making the necessary adjustment and, painful as it may be, the fact that our economy is still down while so many neighbouring countries boast of renewed growth is evidence only that our reforms are going much deeper than theirs. Give it two years or so and some leading tigers of renewed growth such as South Korea will be struggling again with serious financial crises that they are now creating by stimulating their economies much too early. We will have paid our price, changed ourselves where needed, and have built a solid basis for going forward. Don't worry about deflation.