The falls in inflation are a marked decline from June, when year-on-year rises in consumer prices exceeded 6 per cent, a level not seen since August 1997, just before the economy was hit hard by the Asian financial crisis.

The department said the fall was due to a decrease or smaller rise in prices of consumer items such as food, rent, fuel and gas. The increase in the price of food fell from 14.9 per cent in November to 11.5 per cent last month when compared with a year earlier, while rises in package tours dropped from 10.3 per cent to just 1 per cent. Fuel prices dropped by 14.7 per cent in December, year on year.

Prices of staple foods still recorded significant year-on-year increases because of dramatic jumps in the first half of last year. The price of rice, for example, rose by 50.2 per cent, freshwater fish by 26.1 per cent, eggs by 25.6 per cent, canned meat by 22.2 per cent, beef by 20.6 per cent and edible oils by 20.4 per cent.

A government spokesman said the inflationary pressures eased notably in December and would continue to recede globally amid falls in commodity prices and the economic downturn.

Mo Pak-hung, associate professor at Baptist University's economics department, said deflation might appear in the second quarter this year, with a higher unemployment rate matched by falling salaries and rents.

However, Raymond So Wai-man, associate professor of finance at Chinese University, said deflation was unlikely because property values had only dropped moderately so far.

He expected inflation would slow to 1 per cent on average this year.