Hong Kong's consumer price index (CPI) fell 3.8 per cent in August, in line with economists' forecasts. The index has fallen for 58 consecutive months, reflecting a persistently weak domestic demand.

The slide in CPI, announced by the government yesterday, was smaller than the 4 per cent decrease in July.

The narrower year-on-year decline in August was mainly attributed to smaller decreases in charges for package tours and prices of clothing and footwear. Another major factor was a larger increase in the prices of jewellery, a government spokesman said.

The spokesman noted that the government's post-SARS relief measures, such as rates concession and the waiver of water and sewage charges, were having an appreciable downward effect on the CPI.

"Since the government's rates concessions in July and August will come to an end soon; and discounts and sales in the retail sector are fading away, the CPI should go up in the coming few months," Tai Hui, an economist at Standard Chartered Bank, said.

Economists said the narrowed CPI indicated that the deflation pressure was easing because of the recent rebound in Hong Kong's tourism sector and signs of economic recovery.

Daniel Chan, senior economist at DBS Bank Hong Kong, said the holidays in the fourth quarter, together with the continuation of the tourism boom, should help ease the pressure on prices.

"With the help of the influx of mainland tourists, Hong Kong's economy is picking up, helping to stimulate domestic consumption," Chan said. "We should be able to see significant improvement in deflation next year when the economy recovers."

But Marco Mak, head of research at Tai Fook Securities, is less sanguine.

He said the deflationary cycle would end only when property prices begin to stabilize.

"Property prices and rental levels are key to solving the deflation problem because of the fact that housing costs account for a large percentage in the Composite CPI," Mak said.

He added that it would take six to nine months for deflation to narrow a "nominal" number.

Mak also said that the recent tourism boom in Hong Kong should not be seen as the determinant factor in the increase in the CPI figures. He said tourist spending only accounted for 15 per cent of the total consumption expenditure.

What matters most is domestic consumption, he said.

However, he added that the tourism boom has created a chain effect in the local economy, driving up consumer confidence that may eventually translate into a recovery in domestic spending.

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