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 23 May 2000 Deflation: The Beginning of the End? Comment by the Chamber's Chief Economist, Ian K Perkin, on the Consumer Price Index (CPI) numbers for April 2000, issued today, which showed the decline in the Composite CPI moderating to 4.4 per cent on a year earlier, compared with 5 per cent in April. As forecast, consumer price deflation began to ease more substantially in April and, with one or two interruptions, should continue to do so for the remainder of the year. Key factors in the moderation in the decline in April to a negative 4.4 per cent in the composite index were the lower base of comparison last year, some improvement in domestic demand and rises in import prices, especially fuels. These factors should continue to have an impact in the coming months, although with the summer sales season just around the corner, retail prices could come under some additional pressure in the near term. This will be offset somewhat, however, by the lower base of comparison with last year once the summer sales period has ended. Nevertheless, April may mark, in the strongest fashion so far, the beginning of the end of the consumer price deflation the Hong Kong SAR has experienced for the past 18 months. With world oil prices still riding high and other global commodity prices having moved higher there will be some further upward pressure from import price increases in the months immediately ahead. Ironically, the moderation in the rate of decline in consumer prices in April was enough to offset the most recent 0.5 per cent rise in local interest rates, meaning that real (deflation adjusted) interest rates have remained flat. They are still at extremely high levels, however, with the nominal prime rate of 9.5 per cent being equivalent to a real rate of 13.9 per cent once deflation is taken into account. The continued decline in housing rentals is still having a marked effect on the overall consumer price outcome, contributing some two-thirds of the decline in the composite consumer price index. For further information contact Ian K Perkin on 2823-1242
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