Betty Cheung Yuk-lan ponders the news every tai-tai has known for months. The latest retail sales have taken a nose-dive, the Government announced late last month, as the SAR officially moves into deflation. While Mrs Cheung is hard-pressed to define what deflation is except as the opposite of inflation, she knows that sales and 'final reductions' are offered everywhere. Still the shops are empty. 'When the times were good, we used to shop with some abandon. Now we are kind of ashamed to do that,' says the 35-year-old housewife and self-styled tai-tai. 'Now if I need to buy things like curtains, I go with friends to Shenzhen. You can get for $500 what would cost over $2,000 in Hong Kong.' Her husband, Philip, is an information technology manager at an international merchant bank and earns about $60,000 a month. But neither thinks his job is secure. There are talks of a merger with another financial services company, a move that may make his job redundant. The Cheungs are a microcosm of our economy today: job insecurity, consumption outside the SAR, and inability or unwillingness to spend. These are the ingredients that, multiplied tens of thousand times, cause deflation. When few people spend, prices come down, but when prices are down, consumers do not automatically start spending again. This is why the Government's chief economist, Tang Kwong-yiu, refused to use the word deflation to describe the state of the economy in November. 'Deflation means there is a price slump in general,' he said. 'I don't think we should use this word to describe the current situation. Classifying it as deflation will only affect consumption and confidence.' All very well, except that in November Hong Kong recorded a Composite Consumer Price Index (CPI) drop of 0.7 per cent for the first time since the index series was introduced between 1975 and 1980. That decline more than doubled to 1.6 per cent the following month as Gross Domestic Product (GDP) contracted 7.1 per cent in the third quarter. By Government standards, we have moved into a deflationary phase since the economic whirlwind swept across Southeast Asia last year. Experts, however, cannot agree on exactly when deflation sets in, or whether it exists at all. Economist Lui Ting-ming thinks deflation started in May when consumer prices peaked, and it has been accelerating ever since with prices in constant decline. He argues this is a more natural interpretation because prices should be measured month by month, rather than year on year as done by the Government. 'If you want to determine a price trend, you naturally look at data over months to see if it goes up or down,' says Professor Lui, director of the Hong Kong University of Science and Technology's Centre for Economic Development. 'The Government's way of comparing prices in a single month with the same period the year before seems to me a distortion of the real picture.' Data from the Census and Statistics Department is ambiguous, however. A department statistician pointed out that rents, clothing and footwear alone pushed the CPI numbers into negative territory. Prices in food, fuel, transport, alcohol and tobacco are still going up, though at a much slower rate than before. 'It all depends on your definition,' he said. 'If you mean by deflation a general fall in prices across all or most categories, then clearly we don't yet have deflation. But if you take 'general' to mean 'average', then yes, you do have deflation.' The term deflation may be defined as an increase in the value of money relative to the goods and services it can buy. It is generally associated with a prolonged erosion in economic activity and high unemployment. With industrial output contracted by 10 per cent in the third quarter and the jobless rate at a 23-year high of 5.8 per cent and rising, the deflation picture fits Hong Kong's predicament. Obviously, people can buy their way out of deflation, except it is a time of insecurity so they would rather save for a rainy day. 'You may see low prices in stores but you still won't buy because you are not sure if prices have hit bottom,' explained Professor Lui. 'You don't feel safe about your job or you haven't got a job to start with, so you wait like everybody else and that means nobody spends.' Because deflation around the world has become a rare occurrence since the end of World War II, policy planners and financial analysts as a rule exclude it from their forecasts. 'With the exception of [chief government economist Mr] Tang, I don't think any of the policy secretaries know anything about it,' Professor Lui said. 'The Government as a whole hasn't taken a stand on the issue [of deflation].' This may not be quite fair. The Tung administration has taken a series of measures to boost consumer confidence such as selective tax cuts and a one-off rate rebate. This is not counting its controversial stock market intervention in August which surely saved more than a few shareholders from financial ruin. But it is debatable whether the Government package has had any significant effect on consumer confidence. Tang Ka-fai is an assistant front office manager at a five-star hotel and a keen observer of how his customers spend money. 'Ostentatious spending is out,' he said. 'Before at business dinners, top quality shark fins, birds' nest and abalone were staple. Now you have fish and meat and the less expansive varieties of seafood. The locals tip less too.' He said customers now compared prices in menus and read food and wine magazines to find the latest promotions and the best bargains in restaurants and hotels. The Chinese-language Eat And Travel Weekly, which surveys cheap to medium-priced restaurants, is one of the most popular magazines in the SAR. Ken Chan Kai-shui owns an engineering firm that installs central air-conditioning in office buildings. Business is down 60 per cent. He recently had to sack four people from his 24-strong staff and negotiate a substantial cut in annual bonuses with the others. 'Sure, prices are down but so what?' he said. 'My wife and I used to spend money on designer clothes, but we have cut down on that now. We both shop more often on the mainland than before. 'I have a yacht which I take out to sea every weekend. But it's old and I don't want to spend money to upgrade it, not now anyway. At my yacht club, there are fewer yachts now as quite a few have been sold, and those remain are often left idle.' Mr Chan said he believed his business would not return to normal until the end of the year, which tallies with the forecasts of Professor Lui and the Government for the rest of the economy.