PRICES PAID by Chinese consumers fell for the first time in more than six years last month, official data showed yesterday, prompting warnings from economists that the government will need to act quickly if the country is to avoid a bout of deflation.

China’s benchmark consumer price index fell by 1.6 per cent in February from a year earlier, after a 1 per cent rise in January, amid cooling domestic demand and widespread over-capacity.

The year-on-year drop in prices marked the 10th consecutive month of moderating inflation and contrasted with an increase in the index of 8.7 per cent in February last year, the biggest rise in more than a decade, when food and energy prices were soaring.

Beijing has targeted headline inflation of 4 per cent this year. But analysts said it would struggle to meet that target and would have to act quickly to avoid a period of prolonged deflation.

“While the recent surge in money supply growth should translate into higher inflation, shrinking demand and excess capacity is instead generating deflation,” said Jing Ulrich of JP Morgan.

The consumer price fall was outstripped by a 4.5 per cent fall in the producer price index, which tracks prices paid at the factory gate.

China's national bureau of statistics said it was too early to say deflation had taken hold and the falls were largely due to lower raw material prices and distortions from holidays. – ( Financial Timesservice)