The consumer price index slid 2.5 percent from a year earlier after falling 1.8 percent in April, the government said in a statement. The drop was bigger than the median 2 percent slide forecast by eight economists surveyed by Bloomberg News.

"SARS will probably extend Hong Kong's price declines" into next year, said Kevin Lai, an economist with National Australia Bank Ltd.

"With wages coming down, deflation will accelerate."

Cathay Pacific Airways Ltd and 24 other carriers across the world are handing out sweeteners to attract travelers to the city, where tourist arrivals slumped 65 percent in April.

Continental Airlines Inc offered US$499 for a nonstop flight between Newark, New Jersey, and Hong Kong. A year ago, the ticket cost US$1,000.

Severe acute respiratory syndrome has infected 1,755 people in Hong Kong, killing 296.

To avoid contracting the disease, tourists have been staying away from the city and local consumers have been avoiding stores, restaurants and bars.

The disease caused the city's eco-nomy to contract in the first quarter for the first time in almost two years, and prompted the government to halve its 2003 growth forecast to 1.5 percent.

Deteriorating business conditions have led to companies firing workers, pushing the jobless rate to a record 8.3 percent in May. The government predicts the unemployment rate will rise in the coming months, which may make consumers less inclined to spend in a city where retail sales dropped to a decade-low last year.

To lure buyers, Cheung Kong (Holdings) Ltd, the city's biggest property developer by market value, gave discounts worth HK$1.8 million (US$231,000) a week last month to boost sales.

Apparel retailer Esprit Holdings Ltd slashed prices by as much as 70 percent while China-Hong Kong Photo Pro-ducts Holding Ltd, the sole distributor for Fuji Photo Film Co, is selling the Fuji Nexia camera at half the original price of HK$500.

Prices have been in decline since October 1998, when the Asian financial crisis fuelled a collapse in the city's real estate market, sending the economy into two recessions in five years.

Even as property prices have slumped by two-thirds since their peak in 1997, analysts are predicting further declines in home and office prices because of a glut of supply.

Hong Kong hasn't reported any new SARS infections for 12 days and the World Health Organization yesterday removed the city from a list of SARS-infected areas. While the disease has been contained, the damage done to the tourism industry will linger and prices may continue to fall as the island tries to compete with cheaper costs on China's mainland, economists said.

"The gradual integration of the consumer and property markets in the Pearl River Delta region remains the key driver of deflation in Hong Kong," Morgan Stanley economist Denise Yam wrote in a June 17 research note.

(eastday.com June 24, 2003)