China’s factory prices declined at their fastest pace in more than three years in September, reinforcing the case for Beijing to unveil further stimulus as manufacturing cools on weak demand and US trade pressure.

The producer price index (PPI), considered a key barometer of corporate profitability, dropped 1.2% year-on-year in September, National Bureau of Statistics (NBS) data showed on Tuesday. That marked the steepest decline since July 2016 but matched forecasts in a Reuters survey of analysts.

In contrast, China’s consumer prices rose at their fastest pace in almost six years driven mostly by the surge in food prices. However, core retail inflation pressures remain modest, giving policymakers room to introduce measures to prop up demand.

“We continue to anticipate further loosening in the next few quarters as demand-side pressures remain muted and factory-gate deflation deepens,” Martin Lynge Rasmussen, China Economist at Capital Economics, wrote in a note.

The grim outlook is unlikely to change even as tensions in the year-long trade war between Beijing and Washington have eased somewhat. US President Donald Trump said on Friday the two sides had reached agreement on the first phase of a deal and suspended a tariff hike, but officials said much work still needed to be done.

Weak prices were mainly seen in oil and raw material sectors. PPI deflation could deepen due to weakening domestic demand, falling energy and raw material prices and the value-added tax cut that became effective in April this year, analysts at Nomura said.

Some analysts expect China’s GDP growth rate to slip below 6% in the third quarter. The government has set a growth target of 6.0%-6.5% this year.

Trade data released on Monday showed contractions in both exports and imports as US tariffs implemented on Sept.1 came into effect, underscoring the continued impact of the bilateral dispute.

China has taken a cautious approach in dealing with the slowing economy. Stimulus to date has largely avoided dramatic increases in government spending and the central bank has also mainly used the reserve requirement ratio for banks instead of sweeping interest rate cuts.

Chinese central bank governor Yi Gang said late in September there was no urgent need to implement large interest rate cuts following Beijing’s reiteration that it would not use “flood-like” stimulus measures.

Analysts say they expect greater stimulus measures at the end of the month, however, when China’s Politburo, the top decision making political body, is expected to meet.

“Since there is very limited policy autonomy at ministries, local governments, and state-owned enterprises (SOEs), the policy decision pass-through has to come from the above,” said analysts last week in a note from Bank of America Merrill Lynch.

The People’s Bank of China cut a reserve ratio for banks in September, freeing up $126 billion for loans.

Data released by NBS on Tuesday showed China’s consumer price index (CPI) rose 3% from a year earlier, higher than 2.9% tipped by analysts and marking the fastest increase since October 2013, when it rose 3.2%.

While September’s data showed headline inflation at China’s official target of around 3% and core CPI growing a benign 1.5%, food costs continue to soar.

A slide in China’s exports picked up pace in September while imports contracted for a fifth straight month, pointing to further weakness in the economy and underlining the need for more stimulus as the Sino-US trade war drags on.

Analysts say it could take time for Chinese exports to recover given slowing global growth, despite tentative signs of a thaw in tense trade relations between the world’s top two economies.

On Friday, US President Donald Trump outlined the first phase of a deal to end the trade war with China and suspended a threatened tariff hike set for Oct. 15. But existing tariffs remain in place and officials on both sides said much more work needed to be done.

September exports fell 3.2% from a year earlier, the biggest fall since February, customs data showed on Monday. Analysts in a Reuters poll had expected a 3% decline after August’s 1% drop.

“The headline figures suggest that global demand softened last month, adding to the pressure from the US tariffs that went into effect in September,” said analysts at Capital Economics.

Economists also attributed the export slowdown to a fading in the so-called “front-loading” effect.

Reuters