2  BIS Review 38/2002  Hong Kong In Hong Kong, other contributors to deflation over the past few years have been the general strength of the US dollar and the process of price equalisation across the border with the Mainland, although both the IMF and we in the HKMA have found that this latter effect is rather weaker overall than a few 5 well publicised examples might lead one to believe. Hong Kong's deflation, of some 12% in CPI terms over four years, seems, however, to be considerably more than could be accounted for by the above list of essentially non-cyclical factors. We therefore infer that much of it has been cyclical. To what extent has the currency board been responsible for this cycle? About half of the fall in our CPI can be attributed to a collapse of property prices, which feed through both directly and indirectly to the CPI. This in turn was largely the result of the bursting of a previous asset price bubble. This is the part of our deflation which may appear most obviously to be linked to domestic monetary conditions rather than to any global cyclical factors.
Nevertheless, monetary policy might usefully be engaged to avert it. c.  Globalisation and the pervasiveness of the law of one price  Returning to the factors behind current price trends, there is one aspect of globalisation which may be especially relevant. This is the rapid expansion of the range of globally traded output (in contrast to efficiency gains within some pre-defined range), with resultant implications for prices. In the past it was common to observe more rapid domestic inflation in economies enjoying faster productivity growth, as wages rose and the prices of non-tradables accelerated, dragging up the consumer price index. This mechanism, based on an assumed clear analytic distinction between price behaviour of tradables and non-tradables, may still be at work, but surely it is not as powerful as it used to be. The range of tradables is expanding relative to that of non-tradables. While it has long been acknowledged that progressively more goods are becoming tradable because of, for example, advances in freight transportation, the revolution in respect of services may now be more significant. Thus, many services which were in the past produced only in the country where they were consumed can nowadays be outsourced offshore or accessed from somewhere else in the world at the click of a mouse - back-office processing, multi-functional call-centre services, legal advice, logistics management, design services for everything from clothes to buildings, and even certain forms of medical consultation or education, to name but a few.