3rd LD-Writethru-China Focus: China sees consumer inflation, producer deflation in 2015

China's consumer inflation continued to grow mildly in 2015, and producer prices went deep into deflation territory, as domestic demand remained lackluster amid a slowing economy, official data showed on Saturday.

The consumer price index (CPI), a main gauge of inflation, increased 1.4 percent year on year in the last year, down from a 2 percent increase in 2014 and 2.6 percent in 2013, the National Bureau of Statistics (NBS) said in a statement.

The reading hit a six-year low and was far below the government's 3-percent target set for the year.

In 2015, food prices, accounting for one-third of the CPI calculation, rose 2.3 percent and non-food prices edged up 1 percent.

Consumer prices started to pick up moderately in the last quarter of the year as CPI growth recovered to 1.6 percent in December from November's 1.5 percent and October's 1.3 percent.

On a monthly basis, December's CPI edged up 0.5 percent against the previous month.

The NBS attributed the mild recovery mainly to rising food prices as vegetable and fruit prices jumped after rain and snow hindered production. Non-food prices remained flat.

China's producer price index (PPI), a measure of cost for goods at the factory gate, dropped 5.2 percent year on year in 2015, widening from a 1.9-percent slip registered in 2014.

In December, the PPI fell 5.9 percent from a year ago, unchanged from November, marking the 46th straight month of decline.

The decline was due to price drops in oil and natural gas exploitation, ferrous metal smelting, coal mining and fuel gas supply.

HSBC analyst Qu Hongbin said CPI and PPI growth was much lower than previous levels, showing rising deflation pressure caused by sluggish demand will pose a major risk in 2016.

The PPI and CPI are related, as the PPI reflects prices in production, while the CPI reflects prices at the point of consumption. Price fluctuations usually first appear in the production phase before being passed on to consumers.

Bloomberg economist Tom Orlik said with headline CPI now edging up for two months in a row and non-food prices stable, concerns about deflation in the producer sector creeping into the consumer sector may ease somewhat. "Inflation remains low but stable."

But Orlik warned that an unchanged PPI reading suggests December's industrial output could continue to languish, already struggling with a higher base for comparison at the end of 2014.

The NBS is scheduled to release major economic indicators for 2015, including GDP, industrial output and fixed-asset investment on Jan. 19.

Weighed on by sluggish demand, weak exports and flagging investment, China's economy expanded by 6.9 percent year on year in the third quarter of 2015, the lowest quarterly growth in six years.

To combat the economic slowdown, the People's Bank of China cut the benchmark interest rates and the reserve requirement ratio of banks five times in 2015.

Qu called for more policy easing and supply-side reforms to tackle the deflationary risk and help the growth hold steady.

"The CPI remains considerably below the government's target...and is set to stay low heading into 2016. That provides motive and opportunity for further easing," Orlik said.

He expects two rate cuts in the first half of 2016 -- a total of 50 basis points -- as the central bank works to lower real borrowing costs.

To stimulate domestic demand, policymakers have vowed to push forward supply-side policies and measures in 2016, moving the economic model away from one that is reliant on the demand-side strategy of capital investment and exports.

Confronted with lingering downward pressure, the supply side is heralded by many as having the power to sustain growth, as it will improve and increase the supply of goods and services, consequently lowering prices and boosting consumption. Endi