China consumer prices picked up moderately in June, however wholesale prices remained entrenched in deflation, a sign of continued slack in the world's second largest economy.
China's consumer price index (CPI) rose 1.4 percent in June from a year earlier, beating expectations of a 1.3 percent rise as predicted in a Reuters poll and following a 1.2 percent rise in May.
The producer price index (PPI), however, slid 4.8 percent, worse than forecasts for a 4.5 percent fall and after a 4.6 percent decline in May. This marks its 39th consecutive month of declines, according to Reuters.
The continued PPI deflation suggests that overcapacity remains a serious problem and the process of deleveraging has a long way to go, said Li-Gang Liu, chief economist for Greater China at ANZ.
"As commodity prices fell again on Greek default and Chinese equity market rout, PPI inflation is unlikely to turn positive in the next two quarters," he said.
"Based on available data, we believe that China's gross domestic product (GDP) growth may have fallen below 7.0 percent in the second quarter," he added. The GDP data is scheduled for release on July 15.
China's economy grew an annual 7.0 percent in the first three months of the year, the worst showing since the first quarter of 2009.
With no evidence of inflationary pressures on the horizon, Yang Zhao, economist at Nomura says there is sufficient room for further policy easing.
"Subdued CPI inflation reflects still-weak domestic demand. With PPI deflation lingering, there is little inflationary pressure in the pipeline either," Zhao wrote in a note.
Nomura expects one more 50 basis point cut to the banks' reserve requirement ratio (RRR) and an additional 25 basis point benchmark interest rate reduction over the remainder of this year, with the next move likely being a RRR cut in August.
"However, there is a risk of an early RRR cut should the recent measures to stabilize the equity market – such as the suspension of IPOs and the use of the RMB120 billion stabilization fund – fail to stop the plunge," he added.
China markets continued their slide as the data was released, with the benchmark Shanghai Composite opening down over 3 percent before paring losses over the course of the morning session. The index was last seen up 0.6 percent.