Fast-food operators blame rising mainland food prices and a weaker US dollar for an average 20 per cent rise in the cost of supplies, particularly rice and pork, in recent months. Such outlets offered a key barometer of general retail market conditions, suggesting the trend would quickly spill into other retail sectors, economists said.

Fast-food operators have suffered shrinking profit margins but are signalling a restoration of 'pricing power' on the high street that should feed through to their bottom lines.

'This will help the city crawl out of deflation,'' said Joe Lo Nim-cho, an economist at Citigroup.

January price data, released last week, registered the smallest decline since December 2002 with the composite consumer price index falling an annualised 1.5 per cent.

Hong Kong has experienced deflation since November 1998. This has been exacerbated by falling asset prices, crimping consumption and forcing harsh competition among retailers.

A strong US dollar - to which the Hong Kong dollar is pegged - over much of the period added to downward pressure on prices.

Those conditions have changed dramatically with the greenback falling 15 per cent on a trade-weighted basis since January last year, helping the economy swing into a cyclical recovery.

Some private sector economists are tipping economic growth of up to 7 per cent this year.

Cafe de Coral chairman Michael Chan Yu-kwong said he expected 'gentle price increases' by fast-food operators to be mimicked by other mass-market retailers.

The destabilisation of food supplies wrought by the bird flu outbreak and the mad cow disease scare in the United States in the past few months also contributed to rising food costs.

Cafe de Coral responded to higher product costs by raising prices 5 per cent to 10 per cent for certain menu items over the past three months. In absolute terms, the rise was about '50 cents to $1', Mr Chan said.

HSBC economist George Leung Siu-kay said price rises were not limited to fast-food chains.

Clothing and footwear retailers had withdrawn discounts and sweeteners, which meant higher prices compared with several months ago, he said.

Consumption demand would need to stay strong if fast-food operators were to successfully pass along the increased costs incurred from higher imported food prices, Mr Leung said.

'All retailers know that it does not pay to overprice products,' he said.

Cafe de Coral and Fairwood are Hong Kong's two key fast-food chains, serving a combined 153 million customers a year, with an average $24 spent per customer.

Cafe de Coral has 120 fast-food outlets and 80 other restaurants that include Spaghetti House and Ah Yee Leng Tong.

Fairwood Holdings, which runs 93 fast food and speciality restaurants in Hong Kong and the mainland expects to raise prices for the first time since 1998.

'After enjoying a five or six-year price freeze, we are really under pressure to increase prices by 5 per cent to 10 per cent, said chairman Dennis Lo Hoi-yeung.

Maxims has 70 stores in Hong Kong and is examining the impact of rising food costs on its pricing strategy.

Restaurant operators have suffered from low margins and increased competition with receipts falling 9.8 per cent to $48.13 billion last year, from $53.37 billion a year ago and $56.44 billion in 2001.

'These fundamental developments are natural signs of a return of inflation,' said Mr Leung, who expected Hong Kong's deflation to end in the third quarter of this year.

However, supermarket chains Wellcome and ParknShop insisted they had no plans for price increases.

A spokeswoman for Wellcome said the firm could leverage its parent, Dairy Farm International's worldwide sourcing network to sharpen its competitiveness.

'We still provide our customers with the lowest price guarantee scheme,' she said.

Mr Lo of Fairwood said the firm would raise products bought from the mainland to 45 per cent from 30 per cent.

Food costs in the mainland were about 20 per cent lower than in western markets, although rising prices and a potential yuan appreciation could change that, he said.

In November last year, Fairwood launched a $15 million re-branding aimed at boosting average spending at its stores from $24 to $26 per customer.

meal ticket

Cafe de Coral says increase may follow in other sectors

Supply destabilisation contributes to price rise

Increase is about 50 cents to $1 in absolute terms