Producer prices slide as demand weakens in Chinese economy

China's inflation remained subdued in June even as a decline in factory-gate prices stretched out to its longest in a decade, underlining weaker demand in an economy that probably suffered a deceleration in the second quarter.

The consumer price index was down 2.7 per cent from a year earlier, according to the National Bureau of Statistics.

This comes as the lowest first-half inflation since the financial crisis in 2009 with extended factory-gate deflation reflecting a slowdown and overcapacity with the government risking missing its annual growth target for the first time since 1998 according to commentators.

Premier Li Keqiang has been reluctant to introduce short-term stimulus, preferring rather on spurring longer-term expansion by restructuring the economy and curbing the role of the state.

According to Yao Wei, China economist for Societe Generale SA in Hong Kong, who spoke on Bloomberg Television, overall, inflation pressure was still quite muted. He added the growth was expected to continue to slide over the medium term and government efforts to restructure the economy would take time.

Yu Qiumei, a senior statistician, said in a statement that consumer prices in June were basically stable if compared with May and the year-on-year increase resulted from a lower base last June.

The average price of goods leaving the factory gate was 2.7 per cent lower in June than during the same month last year - the 16th straight month of falling producer prices highlighting that producers were struggling to lift prices in an economy that had been cooling for many months.

Prices as seen from the consumer perspective were up slightly, by 2.7 per cent from a year earlier, the country's statistics bureau also reported. This came as slightly more than estimated by economists and represented a slow rate of increase as against mid-2011, when consumer price inflation had surged to over  6 per cent.

Consumer price inflation has since then remained tepid, partly due to the gradual slowdown in the overall economy of the country.

The low rate of increase in consumer prices came as a welcome development for policy makers in Beijing, who have been highly sensitive to any increase in food prices, as these still accounted for a large share of household spending.

However, the deflation in producer prices, has many analysts worried as it underlined sluggishness of domestic demand in China's economy remains.

In a note on Tuesday, analysts at ANZ wrote, the latest producer price reading indicated that ''firms have little power to raise prices due to the lack of demand.''