Prices in Hawai'i are rising at a faster rate than previously thought, eroding consumers' purchasing power and restraining economic growth, according to a report released yesterday by a group of University of Hawai'i economists.

The quarterly report issued by the University of Hawai'i Economic Research Organization also forecast a slowdown in both visitor arrivals and employment growth this year.

"Inflation in Hawai'i has reared its ugly head. Rising prices are cutting into the purchasing power of local residents and will lead to a sharp drop in measured real income growth this year," the economists wrote in the report. "While an orderly process of economic slowing continues to be evident, the inflation impulse introduces some new risks."

Higher housing and energy costs are the main drivers behind the pickup in inflation, according to the report.

The inflation rate accelerated to 6 percent during the first half of this year, the highest in the nation, according to the report. As a result, the UH group revised its full-year inflation estimate up to 5.2 percent from its previous estimate of 3.8 percent issued in May. The inflation rate is expected to remain relatively high, with a rate of 4.2 percent forecast for 2007.

The report also forecast a continuing slowdown in the growth of visitor arrivals. Arrivals are expected to rise by 1.5 percent this year, after rising by 6.4 percent in 2005 and 8.3 percent in 2004. Arrivals from Japan are forecast to decline by 7.4 percent this year after rising 2.7 percent in 2005.

Employment growth is forecast to slow to 2.1 percent this year and 1.1 percent in 2007 after hitting 3 percent in 2005. Job growth in the construction sector is expected to take a big hit as the housing market continues to cool, according to the report.

Inflation-adjusted personal income growth is forecast to slow to 1.0 percent this year after increases of 3 percent in 2005 and 4.6 percent in 2004.