A woman makes a phone call outside a store offering discounts of 60 percent off the regular prices in Hong Kong. The city's Consumer Price Index in July fell 1.5 percent from the previous month, the Census & Statistics Department announced yesterday. Bloomberg News

HONG KONG: The city's July consumer prices fell the most in five years and are unlikely to increase in the coming months as the high jobless rate causes consumers to curb spending.

The Consumer Price Index (CPI) fell by 1.5 percent last month, following a 0.9 percent decline in June, according to figures released by The Census and Statistics Department (C&SD) yesterday.

Weakening demand from shoppers led by a 5.4 percent four-year high jobless rate iscurtailing vendors' pricing powers. Hong Kong's economy grew a seasonally adjusted 3.3 percent in the second quarter from the previous three months as declines in exports and household consumption moderated. Economists believe prices will continue to be under pressure in the months to come.

"Prices are likely to continue to be under pressure, as consumers will remain cautious in spending amidst mounting job losses," said Joanne Yim, chief economist at Hang Seng Bank. Liquidity in the financial system will "buffer prices from a freefall," Yim said.

The government's electricity charge subsidy became the biggest contributor to the year-on-year decline in CPI, C&SD said on its website. The utility prices including electricity, gas and water slid as much as 42.3 percent, the steepest drop among the CPI components, followed by a nearly 23 percent decrease in price for alcoholic drinks and tobacco.

Declines were also recorded for miscellaneous services, 3.8 percent, and durable goods, with their prices falling 3.4 percent.

Averaging out the effects of all governmental one-off relief measures, the year-on-year rate of change in the Composite CPI in July 2009 was minus 0.3 percent, lower than the corresponding rate of change of 0.4 percent in June 2009, mainly due to greater decreases in food prices and smaller increases in the cost of private housing rentals, the government said.

However, economists believe that there is no need to be worried about deflation, because much of the drop in prices is a reaction to surging food and rental costs last year.

A government spokesman said that consumer prices eased further in July as local and upward external price pressures were both virtually absent. "Indeed, this is part of a global phenomenon, with many other economies around the world already experiencing declines in consumer prices as a consequence of the global financial tsunami," he said.

The CPI is likely to stay slightly negative in the coming months, as local price pressures continue to subside and import prices remain soft. This is all part and parcel of the necessary economic adjustment process to weather the shocks of the global financial crisis and economic recession, the government said in a statement.

(HK Edition 08/21/2009 page3)