Hong Kong's deflation cycle extended to a 62nd consecutive month in December but the end appears to be in sight as retail prices are picking up on the back of economic recovery and robust tourism.
Retailers should get a further boost this week during the Chinese New Year holiday, which begins on Thursday. Many workers in the territory get their year-end bonuses shortly before the holiday.
The Hong Kong Tourism Board said it expects 300,000 visitors to arrive from China during the first 10 days of the Lunar New Year, up 22 percent from last year.
Jewellery, photographic equipment and clothing are favourite buys for mainlanders and shops are offering far fewer discounts than a few months ago, indicating retailers are regaining pricing power and the ability to boost profits.
"Retail prices are firmer and we should see deflation end, but not until the second half of this year," said Henry Tsoi, senior economist at Hang Seng Bank.
"Falling housing rentals are a major part of deflation and it will take a year to see positive rental prices because leases are renewed at different times, not all at once."
The consumer price index (CPI) fell 1.9 percent in December from a year ago, the government said on Tuesday, beating forecasts for a 2.1 percent decline and improving on a 2.4 percent year-on-year drop in November.
But housing rentals, which account for more than 30 percent of the CPI, fell 5.5 percent in December from a year ago.
For 2003 as a whole, the index fell 2.6 percent from the previous 12 months, the government said, narrowing from three percent deflation in 2002.
In a further sign that deflation is tapering off, data showed the seasonally adjusted CPI rose 0.3 percent a month on average during the fourth quarter of 2003.
The end of government waivers on water and sewage charges also helped narrow deflation as water and utility charges surged nearly 10 percent from a year ago.
Rents in some areas such as Mid Levels on Hong Kong Island have been stabilising but an oversupply of new housing in recent years means rents are still falling across the territory.
"Rental vacancies are at an all-time high," said Ben Simpfendorfer, an economist at J.P. Morgan.
"The Hong Kong population is growing by about one percent, and that is mostly immigrants, so there is no one to rent these properties. There could be a lag of up to six months between residential property prices going up and rents going up."
Many economists forecast slight inflation by the end of this year as retailers raise prices, rents stabilise and import prices head higher.
An accelerating economic recovery, falling unemployment and heady gains on the stock market have prompted locals to go out and spend. Along with tourists, they helped push up clothing and footwear prices by 3.7 percent in December from a year earlier.
Durable goods prices were weak, though, dropping five percent.
The weak US dollar is also helping to curb deflation by pushing up import prices.
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