The dizzy chronicle of Hong Kong's retail revival at the hands of free-spending mainland tourists is being updated almost daily - first spending limits were raised and now they come across the border with freshly minted credit cards. As wider optimism returns, government officials repeat that the scourge of deflation is almost over and the Hong Kong Retail Management Association forecasts single-digit growth in retail sales this year. But if things are really on the up, Blockbuster's decision to quit the territory and Wing On's closure of stores in Hunghom and Kowloon Bay appear, at the very least, a disturbing coincidence. With the economy on the cusp of a reflationary recovery, why are retailers choosing now to up stakes? Some of the answers lie in the unbalanced taming of Hong Kong's insidious deflation cycle. The government's Consumer Price Index, comprising a basket of widely consumed goods, has always been a fairly imprecise measure of changing prices. When this index finally nudges into positive territory, the optimist's take is that rising prices are a signal of renewed pricing power and a general strengthening in economic activity. This macro trend feeds down to retailers who should see sales and profitability improve. This sequence breaks down if prices are rising because of cost-push inflation which cannot be passed onto price-sensitive consumers - a potentially corrosive mixture for retailer profitability. Last year, the US dollar's slide was perceived as positive, providing an added monetary stimulus to Hong Kong and helping to put a floor under the property market. This year, the sting in its tail is higher import prices. Eventually, the inventory cycle has to catch up with the US dollar's fall - 15 per cent against the euro in the past 12 months - and show up on retailer invoices in the form of higher HK-dollar prices. Retailers cannot pass this cost on to their customers without hitting margins or sales volume. The textbook solution is to substitute domestic production for imported goods. That is much easier in the United States than in Hong Kong's small, open economy. Now, landlords are itching to raise retail rents, and taking evasive action is even more difficult here. After years of deflation and a slew of upbeat property forecasts, landlords are trying to lock in higher rentals when three-year leases fall due. The retail management association has reported that some of its members have been asked to cough up an extra 30 per cent. This would be difficult to swallow outside the tourist-sensitive sectors of jewellery, watches, electronics and cosmetics. Hong Kong's sales-tax-free regime means luxury consumer goods represent a good bargain for mainland tourists. But this tax-efficient shopping is narrowly focused. Other businesses such as food retailing, department stores or car sales will have to rely on a sustained pick-up in income growth to lift spending. With interest rates on savings close to zero, any positive wealth impact is left riding on a sustained improvement in property prices or the stock market. This squeeze makes the retailer's life a hard one - and one that not even free-spending mainland tourists can turn around. Perhaps deflation and a strong dollar were not quite so bad if rents and costs fell faster than revenues. If retailers continue to quit Hong Kong, the victory over deflation may look somewhat hollow.