China's soft factory-gate inflation raises prospect for more stimulus

BEIJING (Reuters) - China's producer prices in December rose at their slowest pace since September 2016 as factories confront a slowdown in demand even as Beijing steps up policy support to bolster the economy.

Consumer inflation for the month also eased from a year earlier due to lower non-food prices, data published by the National Statistics Bureau showed on Thursday.

The slowdown in domestic demand has added to the list of economic worries for China, which is mired in a trade war with the United States, its biggest trading partner.

The producer price index (PPI), a measure of the prices businesses receive for their goods and services, rose 0.9 percent in December from a year earlier - below the lowest forecast in a Reuters poll of 35 economist who had a median estimate of 1.6 percent. The index rose 2.7 percent in November.

On a monthly basis, the PPI fell a steeper 1 percent from a 0.2 percent fall in November.

The sharper-than-expected pullback in prices has raised the possibility of more policy measures to cushion the economy.

"We've always regarded PPI as a leading indicator of China's economic wellbeing, and as its month-on-month growth has now turned negative for the second straight month, it's a signal worthy of vigilance," said Betty Wang, Senior China Economist at ANZ Research.

"If this trend persists, it may turn negative on year-on-year terms this year and more radical stimulus measures, such as benchmark interest rate cuts may become possible."

China's factory activity contracted for the first time in more than two years in December, highlighting the challenges facing Beijing as it seeks to end a bruising trade war with Washington and reduce the risk of a sharper economic slowdown in 2019. [nL3N1Z00VY]

Domestic demand for industrial goods and services has eased in recent months as the government's multi-year campaign to curb corporate debt and risky lending practices has crimped capital spending and corporate investment.

Prices for raw materials increased 0.8 percent last month from a year earlier, down from a 4.6 percent rise in November. Price rises in the production and processing sector slowed in December from the previous month.

The uncertainty created by the trade war with the United States is hanging over China's economy, even though both sides have agreed to a 90-day time-out. There are concerns that the tariff war could still escalate once the truce ends, putting more pressure on Chinese authorities to bolster the economy.

The consumer price index (CPI) rose 1.9 percent in December from a year earlier, down from 2.2 percent in November and below expectations of a 2.1 percent gain. The government's full-year target for consumer price inflation is around 3 percent.

On a month-on-month basis, the CPI was unchanged.

The food price index rose 2.5 percent from a year earlier in December, the same as in November. Non-food prices rose 1.7 percent, compared with 2.1 percent growth a month ago.

The core consumer price index, which strips out volatile food and energy prices, rose 1.8 percent in December, in line with the level seen in November.

(Reporting by Beijing Monitoring Desk and Yawen Chen; Editing by Jacqueline Wong)