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 21 January 2000 Deflation: When will it End? Comment by the Chamber Chief Economist, Ian K Perkin, on today's Consumer Price Index (CPI) numbers for December 1999 and the 1999 calendar year. Hong Kong's first deflationary year in living memory has ended with prices down an average four per cent in the 1999 calendar year and the same amount at year-end. But it's too early to call a quick end to deflation in the SAR economy. The smaller decline of in the composite consumer price index evident in December was limited and probably due to the pre-Christmas price rises in some items. Elsewhere in retail industry, discounting remains the norm, ensuring that downward pressure on prices will remain, at least in the short term. Food prices and housing rentals, the two biggest items in the consumer price index calculations also remain weak. Looking ahead, there is likely to be an upward blip in prices ahead of the Lunar New Year, but after that things are less certain. While demand remains weak, prices will not be able to rise much. On the other hand there will be some flow through of price increases from imports, for example, fuel prices as a result of the sharp rise in crude oil prices. As the year progresses, too, the consumer price indices will be coming off lower monthly bases, meaning that deflation may gradually ease off. The average four per cent decline in the composite CPI for the year means that real interest rates - the best lending rate - was around 12 per cent for the 12 months. If real interest rates remain this high, they will continue to act as drag on any overall improvement in local spending - and investment. This could help keep deflation in place for some months yet, especially if interest rates rise again in the US (and Hong Kong) at the beginning of next month. ¡@
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