China’s consumer inflation hit an 18-month low and factory-gate price declines sped up in March as demand stayed persistently weak, shoring up the case for policymakers to take more steps to support the uneven economic recovery.

In contrast to surging prices globally, China’s retail and producer inflation has remained anaemic as the consumer and industrial sectors struggle to recover from their pandemic hit. Analysts now think consumer inflation could fall short of Beijing’s official targets this year.

The consumer price index (CPI) rose 0.7 per cent year-on-year, the slowest pace since September 2021 and weaker than the 1.0 per cent gain in February, the National Bureau of Statistics (NBS) said on Tuesday. The result fell short of the 1.0 per cent rise tipped in a Reuters poll.

“China’s March inflation report suggests that the Chinese economy is running a disinflation process, which points to bigger room for monetary policy easing to boost demand,” said Zhou Hao, economist at Guotai Junan International.

The producer price index (PPI) fell 2.5 per cent year-on-year, the fastest pace since June 2020 and compared with a 1.4 per cent drop in February. The PPI has fallen for six straight months.

China’s yuan hit a more-than-one-week low against the dollar on Tuesday morning following the data, as investors stepped up bets domestic interest rates could be cut. Shanghai’s benchmark stock index fell 0.25 per cent, reversing a slight uptick in the opening.

Food price inflation, a key driver of CPI, slowed to 2.4 per cent year-on-year from 2.6 per cent in the previous month. On a month-on-month basis, food prices fell 1.4 per cent.

That pushed the CPI down 0.3 per cent from a month earlier after a 0.5 per cent fall in February, dashing expectations of no change. The government has set a target for average consumer prices in 2023 to be about 3 per cent. Prices rose 2 per cent on year in 2022.

“We think consumer price inflation will rebound in the coming months as the labour market tightens again and will peak at 2.3 per cent in early 2024,” said Zichun Huang, China economist at Capital Economics. “But it will be well below the government’s ceiling of ‘around 3.0 per cent’, and the increase in inflation will be far smaller than what was seen elsewhere when they opened up.”

Policymakers have pledged to step up support for the economy, which recorded one of its worst performances in nearly half a century last year due to strict COVID-19 curbs.

Recent data showed China’s economic rebound remained uneven in March with the services sector seeing strong recovery but the sprawling manufacturing sector losing momentum amid still-weak export orders.

Producer prices will likely continue their downturn in the coming period because of weak trade and slow recoveries in consumption and real estate investment, said Bruce Pang, chief economist at Jones Lang Lasalle. “Policies need to prioritise consumption and continue to step up efforts to expand domestic demand.”

Import-dependent industries saw further price declines, with falls in the oil and gas extraction speeding up to 15.7 per cent from 3.0 per cent in February, NBS said in a separate statement.

Producer prices were unchanged from a month earlier.

The country’s central bank cut banks’ reserve requirement ratio in March to support an economy facing headwinds including weak exports and the property downturn.

Beijing needs to “try every method” to stabilise exports to developed countries, Premier Li Qiang said on Friday, warning that the impact of the global slowdown on the domestic economy remains a key concern. Analysts see limits to China’s policy support.

“The PBoC just cut the RRR by 25bp at the end of March. However, Beijing still has no appetite to launch a massive stimulus on concerns of distortions and financial risks,” analysts at Nomura said.

Chinese stocks fell on Tuesday, as sentiment took a hit after data showed China’s March consumer price growth was at its slowest since September 2021, while shares in Hong Kong were up. China’s blue-chip CSI300 Index and the Shanghai Composite Index both closed down 0.1 per cent.

Hong Kong’s benchmark Hang Seng Index and the China Enterprises Index rose 0.8 per cent each.

China’s consumer inflation in March was at its slowest since September 2021, suggesting persistent demand weakness and potential for further policy stimulus.

Meanwhile Chinese banks extended 3.89 trillion yuan ($565 billion) in new yuan loans in March, up sharply from February and surpassing analysts’ expectations. Analysts polled by Reuters had predicted new yuan loans would rise to 3.24 trillion yuan last month, versus 1.81 trillion yuan in February.