Here's what caused the sharp drop in Hong Kong's inflation

Biggest factor was the different timings of the Lunar New Year.

Bank of America Merrill Lynch said headline CPI inflation dropped to -0.1% year-on-year in February from 1.3% yoy in January, below market expectations of 0.7% yoy.

"The sharp drop of February headline inflation was due mainly to the different timings of the Lunar New Year (LNY) holiday (started on 28 January 2017 vs 8 February 2016), as prices for food and travel-related services tend to moderate following the LNY holiday," noted BAML. It said another factor was fresh vegetable price inflation, which slumped because of a high base from a year ago amidst bad weather conditions back then.

Here's more from BAML:

Food price inflation fell to 0.4% yoy in February from 2.8% yoy in January. In particular, vegetable and pork price inflation dropped to -33.9% and 4.7% yoy in February, respectively from -9.3% and 10.9% yoy in January. There was also a significant decline in price inflation of packaged tours to -13.9% yoy in February from 9.1% yoy in January.

Combining January and February data, underlying CPI inflation moderated to 1.5% yoy in Jan-Feb vs 2.0% yoy in December. In our view, this was due to: (1) a high base for vegetable prices from a year ago; and (2) reduced electricity charges effective from January.

Looking ahead, we expect inflationary pressure to remain moderate in the near term. On the domestic front, we expect moderate economic growth momentum in 2017 to keep local cost pressures at bay. Meanwhile, import price inflation will likely remain contained amidst a strong HK$ on a trade-weighted basis on the back of US$ strength.