BEIJING China's factory gate prices fell at the fastest pace in six years in May, faster than forecasts, as a falling demand weighed on a weakening manufacturing industry and cast a cloud over the delicate economic recovery.
China is battling a steep drop in prices as interest rates increase in the United States and Europe, with factories receiving less for their products from key overseas markets.
The producer price index PPI for May fell for an eighth consecutive month, down 4.6 per cent, the National Bureau of Statistics (NBS) said on Friday. The risks of deflation are still weighing on the economy, said Zhiwei Zhang, chief economist at Pinpoint Asset Management. Recent economic indicators send consistent signals that the economy is cooling, he said.
The Consumer price index, CPI, increased 0.2 per cent year-on-year, speeding up from a 0.1 per cent increase in April but missing a forecast for a 0.3 per cent increase.
The CPI's main driver, food price inflation, slowed to 1.0 per cent year-on-year from 2.4 per cent in the previous month. On a month-on-month basis, food prices fell 0.7 percent.
The Australian dollar rose 0.2 percent to $0.6704, marking a fall in the Chinese currency yuan after the inflation data.
The government has set a target for average consumer prices in 2023 to be about 3 per cent. We still think a tightening labor market is going to put some upward pressure on inflation later this year, but it will remain well within policymakers' comfort zone, said Julian Evans-Pritchard, head of China economics at Capital Economics.
The government's ceiling of 'around 3.0 per cent' for the headline rate is unlikely to be tested and we doubt inflation will become a barrier to increased policy support, he said.
China's economy has reported one of its slowest rates of growth in nearly half a century, resulting in policies that have repeatedly signaled their desire to lean on the country's 1.4 billion consumers.
So far, monetary policy and fiscal policy have remained tight, along with lower income growth, so domestic demand is depressed, said Dan Wang, head of Hang Seng Bank China's monetary policy division.
Some economists are expecting the PBOC to cut rates or release more liquidity into the financial system. In March, the bank reduced the reserve requirements of some banks.
China's biggest banks said they had lowered interest rates on deposits, providing some relief for the financial sector and the wider economy by easing pressure on profit margins and reducing lending costs.
The outlook for the year has been downgraded due to the continued signs of slowing. After failing to meet the 2022 objective, the government has set a modest GDP growth target of around 5 per cent for this year.