2nd LD: China May inflation falls to 1.2 pct, more easing needed

China's consumer price index (CPI), a main gauge of inflation, grew 1.2 percent year on year in May, the National Bureau of Statistics (NBS) said on Tuesday.

The reading fell from 1.5 percent posted in April.

On a monthly basis, consumer prices in May slipped 0.2 percent, unchanged from the 0.2-percent drop recorded in April.

Falling prices of vegetables, fruits and eggs due to seasonal factors were the main cause of the CPI decline last month, NBS statistician Yu Qiumei said.

Consumer inflation last month suggests "significant deflation pressures", with an urgent need for more policy easing, said Qu Hongbin, chief economist for China at HSBC.

Falling price levels may be a bonus for consumers in the short term, but factories are likely to postpone their investment and people reduce spending on the prospect of continued price drops.

A combination of muted inflation and slowing economy has troubled the world's second largest economy as it tries to re-tool its economy for quality growth.

China's gross domestic product (GDP) grew 7.4 percent in 2014, the weakest annual expansion in 24 years. GDP growth in the first quarter of the year eased to 7 percent.

The central bank has cut the benchmark interest rates three times since November in a bid to spur the faltering economy by lowering financing costs for enterprises.

The reserve requirement ratio (RRR), the amount of cash banks are required to hold as reserves, was cut by 100 basis points on April 20, the second cut this year and the biggest reduction since November 2008, the height of the global financial crisis.

China targets an annual economic growth rate of around 7 percent for the year and aims to keep inflation at around 3 percent. Endi