A cooling housing market and stubbornly high inflation will cause Hawai'i's economy to slow this year and next, although growth will continue at a "respectable" pace, Hawai'i Pacific University economist Leroy Laney predicted yesterday.

Such a slowdown isn't surprising because the economy, in its 10th year of expansion, has entered a "maturing phase," Laney said at the First Hawaiian Bank Business Outlook Forum at Dole Cannery.

Laney noted that a decline in sales of single-family homes that began in 2005 accelerated in 2006. At the same time, median prices have continued to increase, but at a slower pace than in 2004 and 2005.

"It's fair to say that the local real estate boom is about over," Laney said. "Speculation is much less in evidence, and more buyers just wanting a house to live in are on the sidelines, observing prices more closely."

Some relief in rising home prices is actually good news for the economy over the longer term, he said.

"Unaffordable shelter makes it much harder for those who just live and work here to make ends meet. It also encourages out-migration, discourages in-migration, and aggravates our labor shortage. So current trends really aren't bad news at all."

On the inflation front, Laney said he expects consumer prices to rise 5 percent this year, up from a 3.8 percent increase in 2005. His forecast calls for consumer prices to rise 4.5 percent in 2007.

"You can't sustain the kind of growth that Hawai'i has been experiencing without inflationary pressures building up. For example, the labor shortage puts upward pressure on wages, and rising construction material costs are something builders have been noticing. Add to that the big effects of higher energy and home prices, which also feed into rents and property tax valuations, and we start getting sharply higher readings on inflation."

Laney's forecast also calls for: