Index fall indicates lingering weak market demand and slow recovery

Producer prices - a barometer of future inflation - continued to decline in China in April, pointing to lingering weak market demand and a tepid recovery in the world's second-largest economy.

The Producer Price Index, which measures wholesale inflation, fell by 2.6 percent year-on-year in April, the National Bureau of Statistics said on Thursday.

The drop exceeded the 2.2 percent market forecast and follows a trend of declines, which suggests continued weak market demand.

The decline, which decreased by 0.6 percent from March, marked the 14th straight month of falls after the PPI dropped in March 2012 for the first time since December 2009.

"It suggested excess supply of industrial products while market demand is sluggish," said Lu Zhengwei, chief economist at Industrial Bank.

The Consumer Price Index, a main gauge of inflation, rose 2.4 percent in April from a year earlier, compared with 2.1 percent growth in March, the bureau said.

A statement from the bureau said, "The fast increase of vegetable prices was the main factor that fueled consumer inflation."

Food prices rose by 4 percent year-on-year, contributing 1.33 percentage points to April's CPI.

China has set an inflation target for this year of 3.5 percent, higher than the inflation rate for 2012 of 2.6 percent.

Liu Ligang, chief economist for Greater China at ANZ Bank, said that given weak growth activity and relatively subdued inflation, China may lean toward looser monetary policies to keep liquidity flowing to nurture the recovery, while proceeding with structural reforms to sustain long-term growth.

There is an increasing possibility of an interest rate cut later this year, he said.

But Lian Ping, an economist at Bank of Communications, said such a radical move is unlikely, as current liquidity is sufficient to support growth, and further significant easing may once again fan property prices.

Besides, the central bank's sale of 10 billion yuan ($1.6 billion) of three-month bills on Thursday dampened the possibility of a rate cut, he added.

Luo Gang, chairman of Shanghai Ruinian Fine Chemical Industry Co, said: "A majority of chemical product suppliers have stopped increasing inventory since the middle of 2012, as demand from both overseas and the domestic market is expected to become saturated.