(Reuters) – China’s annual consumer inflation hit a five-year low in January while factory deflation worsened, underscoring deepening weakness in the economy and heaping pressures on policymakers to inject more stimulus to underpin growth.
The risk of deflation is rising for the world’s second-largest economy as a property market downturn and widespread factory overcapacity have been compounded by an uncertain global outlook and falling commodity prices.
A collapse in global oil prices have already unleashed a wave of easings around the world as central bankers from Europe to Canada to Australia sought to defuse the deflationary pressures and bolster their economies.
And more policy support is expected from Beijing after the National Bureau of Statistics said on Tuesday that China’s consumer price index rose 0.8 percent in January year-on-year, undershooting expectations of a 1.0 percent rise and marking the weakest reading since November 2009.
“Today’s data confirmed the economic slowdown in January, while intensifying disinflation will weigh further on firms’ profit margins,” said Julia Wang, Greater China economist at HSBC.
“This increases the need for further monetary easing. We continue to expect another 25bps cut to the policy rate in Q1.”
Analysts also said that factory deflation remains a big worry.
The data showed producer price index dropped 4.3 percent in January from a year earlier, worse than a 3.8 percent fall expected by analysts and extending factory deflation to nearly three years. Price cuts have sapped profitability of Chinese manufacturers.
“The PPI really shocked us,” said Zhu Qibing, a macro-strategist at Minzu Securities in Beijing.
Zhu expects the People’s Bank of China bank to cut interest rates around March and April to support the economy.
The central bank is widely expected to loosen policy further after cutting bank reserve requirements last week for the first time in over two years, seen as a mostly defensive move against capital outflows.
That followed a surprise cut to benchmark interest rates in November, also the first such move in more than two years, to lower borrowing costs and support growth.
Mainland stock indexes rose around 1 percent after the data, led by financial shares. Traders say investors hope for signs of fresh liquidity injections in response to slowing growth although markets have largely priced in more easing.