By Pete Sweeney and Kevin Yao
BEIJING (Reuters) - The pace of Chinese inflation unexpectedly picked up in February, but producer prices continued to slide, underscoring the intense pressure on profit margins at Chinese companies and adding urgency to policymakers' efforts to find new ways to support growth.
The producer price index (PPI) declined 4.8 percent in February, the National Bureau of Statistics said on Tuesday - the most negative reading posted since Oct 2009 - extending a long-running factory deflation cycle that began in 2012 to nearly three years.
Economists and policymakers worry that the risk of deflation is rising for the world's second-largest economy, as drag from a property market downturn and widespread factory overcapacity is compounded by an uncertain global outlook and soft commodity prices.
China's statistics bureau attributed the 1.4 percent rise in consumer prices to higher costs for vegetables and fruit, while the decline in PPI - which analysts had expected to come in at minus 4.3 percent - was blamed on sliding prices for global commodities, in particular energy, which have undermined profitability at China's industrial heavyweights.
"February's seasonal pick-up in food inflation will likely prove short-lived and we still expect inflation to fall back below 1 percent in coming months," wrote Julian Evans-Pritchard of Capital Economics in Singapore. "Nonetheless, today's inflation data suggest that downward pressure on broader prices has begun to ease."
But some economists questioned the significance of the price rise, saying it was disappointing in the context of Lunar New Year, and noted there was no significant increase in the price of pork, which usually rises around the week-long festival.
Annual changes in China's consumer prices will remain positive in the foreseeable future, the Shanghai Securities News on Tuesday quoted vice central bank governor Yi Gang as saying, while economists note the structure of consumer inflation is changing, showing rising costs for services, clothing, healthcare and recreation instead of residential inflation, which slowed to 0.6 percent.
"We continue to expect inflation to remain relatively low and still see disinflationary pressures in the economy," wrote Nomura economists in a research note after the news.
"To offset headwinds to economic growth, we expect monetary policy to be loosened further."
The question is how long it will take for easing measures to take effect. The issue is becoming more pressing because unemployment, which has remained comfortably low even in the face of a weakening economy, is seen as coming under further pressure, the social security minister said on Tuesday.
Indeed, some economists suspect that many jobs are artificial, with factory workers being put on half-pay or no pay, or migrated to low-end service sector jobs in tourism by local officials to avoid social unrest from layoffs and the negative career consequences of high unemployment rates in their jurisdictions.
Chinese leaders announced last week an economic growth target of around 7 percent for this year, below the 7.5 percent goal in 2014.
The consumer price index target was set at around 3 percent for this year. Annual consumer inflation was 2 percent in 2014, well below the government's target of 3.5 percent.
Chinese stock markets were down slightly after the news, dragged by financials, with the CSI300 index (CSI300) down 0.5 percent in morning trade. The yuan
Combined January and February industrial output, retail sales and investment data will be released on Wednesday. All are expected to show slowing growth. Loan and money supply data will also be released this week.