While the territory is probably heading for a bout of deflation in coming months, analysts say the cycle could be temporary as rising oil prices are expected to boost the cost of transport and some public services, while retailers gain some room to lift prices amid expectations the economy will pick up next year.

'We might see one or two months' of deflation in the third or fourth quarter, but it will be mild, not serious,' said Daniel Chan, senior investment strategist at DBS Bank.

Inflation, which stood at 0.6 per cent in April, has come down from a peak of 6.5 per cent last summer, as increases in housing rents and food prices have slowed sharply and the government has extended temporary waivers on utilities and other services.

Netting out temporary waivers, underlying inflation in April stood at 1.9 per cent, down from 5.4 per cent a year earlier.

Housing rents are actually lower than a year ago, but they still show up as positive in the consumer price index because tenants typically are locked into two-year lease agreements. In April, the index's housing component rose 5.4 per cent, easing from a 5.7 per cent increase in March. Food prices in April rose 2.2 per cent, down from a 5.4 per cent rise in March.

An economic recession, which began in the third quarter of 2008 and has deepened this year, has depressed consumer spending and many shops are now offering heavy discounts to sell stock.

Negligible inflation, and even slight deflation, is therefore seen as positive since consumers are not having to pay more for goods. Prolonged deflation, however, could encourage people to put off spending in anticipation that goods will become even cheaper.

Economists say the economy may be bottoming out even though exports continue to fall sharply.

They see it stabilising in the second half of this year, although the government forecasts gross domestic product, which fell 7.8 per cent in the first quarter from a year earlier, will shrink by up to 6.5 per cent for the year as a whole, its worst year since 1998 during the Asian financial crisis. -- REUTERS