It finally happened in July. After nearly six years of deflation, Hong Kong bid "goodbye", at last, to the painful economic trend during which many middle-class families lost their wealth to become negative equity holders.

The composite Consumer Price Index (CPI), which measures the cost of a basket of commonly used goods and services, finally bounced back last month, it was revealed Monday.

The index rose by 0.9 per cent in July from a year earlier as compared to a decrease of 0.1 per cent in June, marking an end to 68 months of deflation since November 1998.

The government said the increase in CPI has reflected the combined forces of improved economic conditions, revived consumer demand and rising import prices under the broad-based economic recovery.

Local business leaders and economists Monday welcomed the news, saying that this development reflects a strong rebound in the local economy and would stimulate further growth in the short-term.

Price increases were widely seen for most types of goods and services, including clothing, footwear, food, utilities, transport, miscellaneous goods and services, the government figures showed.

Financial Secretary Henry Tang said that while he was pleased to see the end of deflation, the community should guard against an inflation that may be too high.

If inflation is appropriate, it would be alright. Should it be too high, it will increase the burden of citizens, Tang said after attending a luncheon function of Hong Kong Economic Summit.

He said there will be a certain degree of pressure if salaries are not increased in an inflationary environment. Tang expected that Gross Domestic Product (GDP) growth in the second quarter would be double-digit.

GDP leaped by 6.8 per cent in real terms in the first quarter over a year earlier, further up from the 4.9 per cent growth in the fourth quarter of last year.

Also, Tang predicted that GDP growth for the year may exceed the earlier forecast of 6 per cent if the existing strong economic rebound continues.

According to Census and Statistics Department Monday, the year-on-year increase in the Composite CPI was mainly attributable to a lower base of comparison brought by the rates concession granted by the government in the third quarter last year.

Other factors included the renewed increase in the prices of fresh vegetables and enlarged increase in charges for package tours and in the prices of jewellery.

Among the various CPI components, the biggest year-on-year increases in prices were recorded for electricity, gas and water, followed by clothing and footwear, and miscellaneous goods.

Instead, the biggest drop recorded was the cost of housing.

The general price level has stabilized since last year and retail sectors have started adjusting price levels upward, said Daniel Chan, senior economist of Dao Heng Bank.

"The increase of price level is mild and it is within market expectations. However, some uncertain factors, such as rising oil prices and the overall economic performance in US, still affect the local economy."

Amid a high unemployment rate and wage freeze on the majority of local workers, Chan said the inflationary environment might weaken citizens' consumption sentiment, particularly those in lower and grassroots' classes.

Chan forecast that the GDP figure in the second quarter would reach 10.5 per cent.

Vincent Kwan, chief economist of Hang Seng Bank, predicted Monday the price index would remain flat or drop slightly by the end of this year.

Kwan said the public does not need to worry about continuous price rises in the short term.

Dr Eden Woon, director of Hong Kong General Chamber of Commerce, Monday welcomed the coming inflation as he believed it would stimulate more investment and economic activities.

Peter Wong, director of Standard Chartered Bank, noted at the Hong Kong Economic Summit that the strong GDP growth has already benefited the local economy. The number of homeowners with negative equities and the number of bankruptcy cases have decreased this year.

(China Daily HK Edition August 24, 2004)