specific activities - heritage tourism perhaps, but even that is not immune from the pressure of the law of one price, if one considers the competing heritage sites around the world. i see some evidence in hong kong of the impact of this process of more broad - based globalisation, and i am sure it is happening elsewhere too. liberalisation of trade policies and the achievements of the wto will also have contributed. thus, deflation is being driven in part by the expansion and intensification of competition across an ever larger range of sectors and countries. this may explain why some price surprises on the macro - policy front in the recent past have been on the downside, but if central banks can digest this ingredient there is no reason why they should be more than temporarily knocked off course by it. for the uk, the peak - to - trough comparison would be 1873 - 95, during which the average compound deflation rate was 1. 7 % pa. my thanks to hkma colleagues daryl ho and lu dai for researching the historical data. 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 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. however, although it is clear that monetary conditions in hong kong were, as a consequence of being tied to those in the us through the currency board mechanism, looser during the mid - 1990s than one might ideally have wished, and although empirical research suggests that there is a relationship between the property cycle and interest rates, this relationship is not found to be a particularly robust or powerful

being more the result of monetary policy mistakes, such as those associated with the great depression, than of supply - side forces such as were so plainly evident half a century earlier. inflation did not really become re - established on a significant scale until the second world war, after which it persisted for most of the remainder of the twentieth century. most recently, the potential problems posed by deflation, particularly in a financially developed world where debt and balance sheets interact, have become apparent, most notably perhaps in japan. all in all, there is perhaps a mixed message from these historical examples. it may be possible to live comfortably with a modest pace of deflation, especially if it reflects benign supply - side influences. 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. moreover, buyers of services increasingly elect to travel elsewhere to consume them. thus the international price elasticity of a wedding ceremony, a game of golf, hospital or health spa treatment, or conference facilities is ever rising. soon there will remain only very few location -