China inflation
A vendor carries a basket of fresh fish at a seafood market in Quanzhou, China. Reuters

China's consumer price inflation cooled to the lowest level since January 2010, signalling deflation risk and growth slowdown in the world's second-largest economy in the absence of further easing in monetary policies.

Consumer price index (CPI) inflation slowed to 1.6% year over year in September, the lowest level in about five years, compared with 2% in the previous month. Economists expected an inflation rate of 1.7% for the month.

On a monthly basis, CPI increased 0.5%, compared to a 0.8% growth in September 2013.

The lower inflation rate is primarily attributed to low food prices during mid-autumn festival and before National Day holidays. Prices of tobacco and liquors have dropped to negative territory since September 2013.

Economists at ANZ bank attributed the development to the ongoing anti-graft campaign that "could have significantly eased upward pressures on prices."

Meanwhile, producer price index (PPI) deflation widened 1.8% year on year in September, 0.6 percentage points lower than last reading, reflecting a destocking process amid sluggish domestic demand.

ANZ economists noted that the profit margin of Chinese companies would be further squeezed and their capital expenditure demand will remain weak in the next few quarters.

"China's soft inflation profile heightens the risk of deflation, thus requiring further monetary policy easing," they said in a note.

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The Peoples' Bank of China (PBoC) on 14 October lowered the 14-day repo rate by 10 basis points to 3.4%. This was the third time that the PBoC reduced 14-day repo rate, suggesting that China's monetary easing bias remains.

"In our view, the PBoC could adjust repo rates more frequently in the future and will experiment the transmission from repo rates to deposit and lending rates of commercial banks," ANZ economists added.

"The PBoC appears to use some innovative policy instruments to implement monetary policy, indicating that China is pushing towards interest rate liberalisation."