HONG KONG: The city's headline inflation accelerated in January as the three-day Chinese New Year holiday prompted extra spending. But underlying inflation slowed, indicative of the economic slowdown.

Consumer prices rose 3.1 percent from a year earlier, the government said yesterday on its website, after gaining 2.1 percent in December. That was more than the 2.4 percent median estimate of 12 economists surveyed by Bloomberg News.

Inflation has cooled from last year's decade high of 6.3 percent, as the global financial crisis and the city's recession have dampened confidence and spending.

The recent holiday, which had fallen in February last year, gave a temporary boost to consumption as families bought clothes, furniture and food to celebrate.

"The timing of the lunar new year holiday translated into higher consumer demand in January," said David Cohen, an economist at Action Economics in Singapore. "However, this temporary disruption won't change the easing trend of inflation as the economy continues to contract."

Government relief measures, such as waivers of property rates, are also distorting the numbers. Eliminating their effect, the underlying inflation slowed to 4.5 percent in January from 4.6 percent in December, the government said in the statement.

Calyon analyst Eric Tsang said: "The rates concession, and the fact that the lunar new year holiday fell in January this year ... helped push up headline inflation. This is more a blip than a trend, because commodity prices and economic activity are all consistent with lower inflation."

DBS Bank's senior investment strategist, Daniel Chan, said the underlying inflation will continue to ease, reflecting an economic recession, which will drag down prices.

"We worry that in the middle of this year we could face deflation as people are delaying consumption because of the recession," he said.

Food prices rose 7.2 percent in January from a year earlier after gaining 7.7 percent in December. Private-housing rents increased 8.8 percent after climbing 6 percent. Utility costs slumped 42 percent after falling 37.1 percent.

Hong Kong is in its first recession since the SARS epidemic in 2003. Gross domestic product shrank a seasonally adjusted 0.5 percent in the third quarter of 2008 from the previous three months, after contracting 1.4 percent in the second quarter.

Agencies

(HK Edition 02/24/2009 page16)