In the UK, it's just titch. jk I think it varies by person and by context. Some prefer "midget" in a funny sense, but for the main I would just use "short." Btw, the official terms for the condition are "dwarfism" and "short stature."
Personally, I don't understand "vertically challenged", can you be challenged if you can't possibly change the situation? I think, perhaps "vertically limited" might be more accurate. PC terms only seem to make a delicate situation worse by not only underlining the fact but making it unspeakable. Short people know they're short and they'll only be offended if it is noted unnecessarily or condescendingly.
certainly the second one is less condescending but why would the situation call for the designation? Do you say "hello, woman" or "hello there, black man" when you meet those people? I'm not Miss Manners, but why be discourteous?
I think everyone has there own preferences, You would think people prefer dark skin that's why they are out in the sun and at the tanning beds Always striving to look better, but not striving to be better people.
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