The composite consumer price index, a gauge of inflation, jumped 1.6 percent last month after a 1.4 percent gain in August, the Census and Statistics Department said Friday.

The increase was in line with expectations.

Last month's figure is the sharpest climb in prices since the 2.5 percent posted in September 1998, two months before Hong Kong entered an almost six-year downward spiral in consumer prices.

The gain last month was "in tandem with the increasingly entrenched economic recovery and the gradual feed- through of higher private housing rentals for fresh lettings into the CPI rental component," a government spokesman said.

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Removing the more volatile elements of the index indicated less severe inflation last month.

"If you take out the housing and utilities, which are very volatile and not very well measured, then inflation is lower than for most of this year," said David O'Rear, chief economist of the Hong Kong General Chamber of Commerce.

Inflation amounted to 1.5 percent in September if the housing and utilities components are removed and five of the first nine months this year were actually higher by this measure, O'Rear said.

Half of Hong Kong's housing stock is subsidized, with the rents barely changing.

The remainder is split between owners and tenants, and the real costs for owners are in mortgage payments, said O'Rear, who forecast inflation of 1 percent this year and up to 3 percent next year.

The housing subindex, which accounts for about 30 percent of the composite index, rose for the first time in seven years in July when it was up 0.5 percent year on year.

Residential leases typically run for two years in Hong Kong, meaning that relatively cheap contracts signed in 2003 during the SARS crisis are now coming up for renewal.

Rising housing rentals will continue to dominate headline inflation next year, economists said.

"The headline inflation figures will continue to be driven by the increase in housing costs, breaking through the 3 percent mark by the first quarter next year," said Kent Yau, deputy head of Hong Kong research at Core Pacific- Yamaichi, who expects a 1.4 percent inflation rate this year.

A Reuters survey of six economists had forecast a CPI increase of 1.6 percent for last month.