BEIJING (Reuters) - China's annual consumer inflation hit a five-year low in January while factory deflation worsened, underscoring deepening weakness in the economy and heaping pressures on policymakers to inject more stimulus to underpin growth.
The risk of deflation is rising for the world's second-largest economy as a property market downturn and widespread factory overcapacity have been compounded by an uncertain global outlook and falling commodity prices.
A collapse in global oil prices have already unleashed a wave of easings around the world as central bankers from Europe to Canada to Australia sought to defuse the deflationary pressures and bolster their economies.
And more policy support is expected from Beijing after the National Bureau of Statistics said on Tuesday that China's consumer price index rose 0.8 percent in January year-on-year, undershooting expectations of a 1.0 percent rise and marking the weakest reading since November 2009.
"Today's data confirmed the economic slowdown in January, while intensifying disinflation will weigh further on firms' profit margins," said Julia Wang, Greater China economist at HSBC.
"This increases the need for further monetary easing. We continue to expect another 25bps cut to the policy rate in Q1."
Analysts also said that factory deflation remains a big worry.
The data showed producer price index dropped 4.3 percent in January from a year earlier, worse than a 3.8 percent fall expected by analysts and extending factory deflation to nearly three years. Price cuts have sapped profitability of Chinese manufacturers.
"The PPI really shocked us," said Zhu Qibing, a macro-strategist at Minzu Securities in Beijing.
Zhu expects the People's Bank of China bank to cut interest rates around March and April to support the economy.
The central bank is widely expected to loosen policy further after cutting bank reserve requirements last week for the first time in over two years, seen as a mostly defensive move against capital outflows.
That followed a surprise cut to benchmark interest rates in November, also the first such move in more than two years, to lower borrowing costs and support growth.
Mainland stock indexes rose around 1 percent after the data, led by financial shares. Traders say investors hope for signs of fresh liquidity injections in response to slowing growth although markets have largely priced in more easing.
"This will likely be the low point for CPI inflation given that oil is rebounding. Still, the data will increase rate cut expectations and we see a cut in March," said Dariusz Kowalczyk, senior economist at Credit Agricole in Hong Kong.
Distortions caused by the timing of the Lunar New Year may have exaggerated weakness in the headline inflation number due to stronger pre-holiday spending in January last year. The new year fell on January 31 in 2014 but will be on Feb 19 this year.
Food price rises eased to 1.1 percent in January from 2.9 percent in December, contributing about 80 percent of the decline in January inflation, the statistical bureau said.
Data over the weekend showed a surprising plunge in China's imports, suggesting the economy is continuing to lose momentum despite a raft of stimulus measures. Still, analysts say the impact of holidays may have distorted the extent of the downturn.
The statistics bureau will release combined data for January and February next month to help smooth out distortions from the Lunar New Year holidays.
Yu Qiumei, a senior statistician at the National Bureau of Statistics, said worsening factory price deflation in October was mainly caused by a drop in global oil and commodity prices.
The government is expected to set an inflation target for 2015 at the opening of the annual parliament meeting in March. Sources have told Reuters that the government is looking at lowering its inflation target to around 3 percent this year.
Consumer prices rose 2 percent in 2014, coming in well below a target of 3.5 percent as deflation fears intensified.
The government is also expected to lower its GDP target to around 7 percent this year, after the economy grew 7.4 percent in 2014 - the slowest pace in 24 years.
(This version of the story corrects inflation reference to annual from month-on-month in fourth paragraph)
(Reporting by Judy Hua and Kevin Yao; Editing by Pete Sweeney & Shri Navaratnam)