Hong Kong consumer prices fell by their largest amount in more than three years in July, reflecting persistently-weak consumer confidence in the wake of SARS and extending the territory's deflationary spiral to a 57th month.

Waivers on property and water rates last month, introduced as part of a government relief package, aggravated price declines and will keep deflation high for the next few months, economists said.

However, an expected influx of tourists from the mainland next month after visa restrictions are eased could lift prices of popular high street goods and ease the downward pressure later in the year.

Hong Kong's composite consumer price index (CPI) fell 4 per cent in July year-on-year, the government said yesterday, its biggest slide since a 4.5 per cent drop in June 2000.

The price decline compared with a 3.1 per cent drop in June.

"Overall consumer prices fell more in July than in June, mainly due to the downward effect of the rates concession granted by the government for the third quarter of this year," the government said in a statement.

However, netting out the rates' effect, CPI was still down around 3 per cent in July from a year earlier, it said.

"This showed that even with sentiment improved after SARS, local retailers and service providers generally continued to exercise price restraint so as to foster sales," it said.

Housing rentals slumped 7.7 per cent year-on-year in July while prices of durable goods skidded 7.1 per cent and clothing and footwear prices fell 4.8 per cent, the government said.

SARS, which hammered consumer spending and brought an already weak property market to a standstill, was contained by the territory in June but the economy only recovered slightly in July.

Unemployment, which hit a fresh record of 8.7 per cent in the three months through July, was another deterrent to spending.

Bargains are abundant. At the Walker Shop in Tai Koo Shing, consumers can buy shoes at a 70 per cent discount, and further discounts are available if they buy more pairs.

But sales signs are far less prominent than a month ago.

"This year, because of SARS, the big sales happened earlier so it's possible they will end earlier and that means there is less risk of a further deterioration in deflation," said Marvin Wong, an economist at Merrill Lynch.

Financial Secretary Henry Tang said this week that he believed unemployment was stabilizing. Once it starts to fall, consumer spending should improve, economists say.

However, housing rents, a major component of CPI, will continue to weigh on the index due to an oversupply of property.

The government said last month that supply of new property would fall from next year. It is also expected to announce measures in October to support the ailing residential market, where prices have plunged 65 per cent from a peak in 1997 - but rents are unlikely to rebound this year, economists said.

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