BEIJING China's annual inflation rate hit 3.6 percent in March, with volatile food prices leading a temporary rebound that pushed costs above expectations but left intact the view that Beijing has the flexibility to ease monetary policy to support growth.
The view that a cooling economy has eclipsed inflation as Beijing's biggest near-term worry was further reinforced by surprisingly soft producer prices, which fell 0.3 percent from a year ago, sparking concerns that it indicated weakening demand.
Analysts said Monday's price data suggested China's inflation is set to moderate rather than slow dramatically in coming months, and that Beijing will likely meet its 2012 inflation target of 4 percent even as it slowly loosens policy.
"Nothing in this (March) number looks like it is pushing me away from the comfortable view that inflation is on a downtrend," Tim Condon, head of Asian economic research at ING in Singapore, told Reuters.
"The overall trend is that food is going to be dragging down the consumer price index over the course of the entire year," he said.
Economists polled by Reuters had forecast China's consumer inflation to run at 3.3 percent in March from a year ago, compared with February's 3.2 percent, while producer prices were seen easing 0.2 percent.
"My concern is not about CPI, it's about PPI. We've been concerned about PPI for a while," said Ren Xianfang, an analyst at IHS Global Insight in Beijing.
"Since the final quarter of last year, it has been falling towards deflationary territory and now it has been realised. This will affect our outlook about how fast the economy is recovering," she said.
Economists expect data on Friday to show China's economy grew at its slowest paces in nearly three years between January and March at just 8.3 percent, as exports cooled and tight domestic credit conditions further crimped local demand.
A breakdown of the data by the National Bureau of Statistics showed that food prices were the biggest driver of inflation, although some price pressures were tapering off.
The price of pork, a staple in the Chinese diet, surged 11.3 percent from a year ago, but fell 4.8 percent from February.
Vegetable prices, on the other hand, were up 6 percent from a month earlier and soared 20.5 percent on the year in March.
Given the month-on-month fall in pork prices, the overall rise in inflation appears to be a short-term rebound and "the trend is still headed lower," said Li Wei, an economist at Standard Chartered in Shanghai.
"March was a relatively cold month in the north so that may have contributed to food CPI being stronger than expected."
Many analysts expect price pressures in the world's second-biggest economy to stay restrained for the rest of 2012, in part due to high year-ago comparison figures.
That would give China's central bank ample scope to unwind some of its strident tightening between 2010 and 2011, when it raised interest rates five times and the amount of cash banks are required to hold as reserves a total of 12 times.
A Reuters poll showed economists think Beijing could cut banks' reserve requirement ratios (RRR) by another 150 basis points before December to 19 percent to encourage banks to lend more to cash-strapped firms.
Although China raised retail gasoline and diesel prices in March by 6-7 percent, analysts say that has limited direct impact on overall inflation as they believe energy carries a small weight in China's consumer price index basket.
(Editing by Richard Borsuk)