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Feeble China inflation bolsters stimulus hopes

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Chinese consumer prices eased in September while producer prices remained firmly in deflation, fanning speculation of additional monetary easing to shore up demand in the world's second largest economy.

The consumer price index (CPI) rose 1.6 percent in September from a year earlier, against forecasts of a 1.8 percent rise from a Reuters poll and following August's 2 percent gain, official data showed on Wednesday.

The producer price index (PPI) fell 5.9 percent, in line with expectations and after a 5.9 percent fall in the previous month. The PPI, which measures wholesale prices, clocked its 43rd straight month of declines as producers dealing with spare capacity and feeble demand for their products cut their prices.

"Overall, the still weak PPI highlights the severe overcapacity problem and sluggish domestic investment demand, in our view," said Yang Zhao, China economist at Nomura.

"Looking ahead, we expect CPI inflation to remain subdued and see downside risk to our forecast of 2.1% for Q4. PPI inflation should remain in deep negative territory (below -4% y-o-y) due to overcapacity, although it may improve slightly from Q3 due to a lower base in Q4 2014," Zhao said.

The latest inflation numbers, which come on the heels of weak import data, reflect continued slack in the world's second largest economy. Imports tumbled by a worse-than-expected 20.4 percent in September, following a 13.8 percent slide in the previous month, data on Tuesday showed.

Read MoreChina imports collapse in September, exports remain weak

The recent run of subdued data has raised expectations for further monetary easing and fiscal support .

"Given the lacklustre growth outlook, we continue to expect moderate fiscal stimulus from the central government and continued monetary easing," said Zhao, who expects a reserve requirement ratio (RRR) cut in the fourth quarter.

The monetary easing will continue into 2016, Zhao said, predicting four RRR cuts - 50 basis points each - and two benchmark interest rate cuts - 25 basis points each - next year.

Stimulus calls mount

Inflation and trade data come days before the publication of China's highly anticipated third quarter GDP report on October 19. The economy is forecast to have slowed further in the July-September period, dipping below 7 percent and down from 7 percent growth in the first two quarters of the year.

"Market median is for a cooling from 7.0% to 6.8%, consistent with the softer signals from the PMIs and harder data to date. We are a shade higher at 6.9%, only because the plethora of indicators focuses on slowing manufacturing, glossing over the much stronger services sector," Beacher said.

"We remain of the view that 6.8% GDP growth is likely for 2015, which is close enough to the 'about 7%' official GDP target."

Wednesday's consumer price data showed food price inflation for last month came in at 2.7 percent, down from 3.7 percent in August. Pork price inflation, which fell from 19.6 percent to 17.4 percent, was a key driver.

"Chinese Sept CPI corrected a little more than expected: the food price jump of August washed out of the index in September," said Annette Beacher, chief Asia-Pacific macro strategist at TD Securities.