Hong Kong economic activity tapered off for the first time in 18 months last month as nascent inflation prompted companies to delay non-vital expenditure, according to a survey. The monthly Hong Kong Purchasing Managers' Index, a barometer for the city's business conditions, also showed new business shrank for the first time since May 2003 while the backlog of work contracted slightly for the second straight month. Despite the contraction, average payroll costs continued to grow, demonstrating a relatively tight labour market. After adjusting for seasonal changes, the index stood at 48.4, a level slightly below the no-change benchmark of 50. The culprit behind the poorer business conditions was a marked increase in total output and input costs, with average purchase prices and payroll costs higher than in November. Surveying the business levels of 300 companies, the index found output prices jumped for the fourth consecutive month last month as companies continued to pass on higher costs to customers. 'However, the rate of inflation of charges was slower than in the previous month and remained well below that of costs, suggesting a further squeeze of firms' operating margins,' the index report said. Raw material costs were on the rise largely due to shortages of steel, oil and paper products.