(Bloomberg) -- China’s consumer and producer inflation remained muted in March, suggesting more monetary or fiscal stimulus may be needed to strengthen the economy’s recovery.

The consumer price index rose 0.7% last month from a year ago, the National Bureau of Statistics said Tuesday, weaker than the 1% forecast by economists in a Bloomberg survey. Producer price deflation worsened to 2.5%, the lowest since June 2020. Core inflation, which excludes volatile food and energy prices, climbed slightly to 0.7% from 0.6%.

The “economic recovery is on track but not strong enough to push up prices,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “This suggests the economy is still running below its potential. There is room for fiscal and monetary policies to boost growth further.”

While the economy has been recovering post-Covid, the figures indicate domestic demand remains weak, giving authorities space to roll out more supportive policies to bolster the consumption-led rebound. CPI has remained well below a government-set target of around 3% for the year. 

Household sentiment for income and jobs has remained below pre-pandemic levels, while exports are falling and the property market, although stabilizing, is still fairly subdued. Data last week showed manufacturing activity eased in March as the global trade outlook weakened. 

China’s benchmark CSI 300 Index of stocks traded 0.3% lower as of 2:33 p.m. local time, underperforming Asian equities that rose 0.7%. The yield on 10-year government bonds fell two basis points, on pace to drop for a third-straight day.

China’s muted inflation stands in contrast to other economies, including the US where stubbornly high prices have tested the Federal Reserve’s policy strategy. 

Economists expect US consumer inflation, which is set to be released Wednesday, to have been softer in March than the prior month, but still elevated. Traders are betting on another quarter-point rate hike in May after strong employment data last week.

The People’s Bank of China, meanwhile, has so far been reserved in providing support. Instead of cutting interest rates this year, the central bank has supported lending by reducing the reserve requirement ratio, or the amount of cash banks must keep in reserve.

Stimulus has also come in the form of an infrastructure push, with Chinese provinces planning to increase spending on major construction projects by almost a fifth this year.

The subdued inflation data, though, suggests the central bank may have to do more to support the recovery in terms of policy rate cuts. 

What Bloomberg Economics Says ...

“Overall, the data reinforce our view that the People’s Bank of China must — and will — cut its one-year policy rate in 2Q. We see a 10-basis-point trim. That’s not aggressive action, but it would signal a supportive stance and could help raise confidence.”

— David Qu, economist

Read the full report here.

The government could also consider more fiscal stimulus, said Iris Pang, chief economist for Greater China at ING Groep NV.

“There is no need to adopt a wait-and-see approach anymore,” Pang said, adding that authorities should consider more infrastructure investment and consumption stimulus, such as electric vehicle subsidies. “The data shows that external demand weakness has affected China’s manufacturing and the manufacturing labor market.”

An influential government-linked economist has also called for stronger monetary policy action. In an interview published by the Shanghai Securities News on Tuesday, former central bank adviser Li Yang said the PBOC can provide more support to fiscal policy given that government debt accounts for a relatively small proportion of the central bank’s overall assets.  

While he didn’t go as far as saying the PBOC should directly buy government bonds — something it’s prevented from doing by law — Li said it’s now “more important than ever” to better coordinate fiscal and monetary policy. Li attended a meeting with Finance Minister Liu Kun and other experts last week to discuss economic and fiscal issues. 

Next week, the NBS is set to publish key economic indicators for the first quarter of 2023, which will likely show an acceleration in growth, fueled by a rebound in consumer spending. That’s likely to be followed in coming weeks by a meeting of the ruling Communist Party’s powerful Politburo, which will assess the economic performance so far and chart key policies going forward.

“Authorities need to beef up policy support to drive domestic demand, prioritizing the restoration and expansion of consumption,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc.

--With assistance from Yujing Liu.

(Updates with additional details throughout.)

©2023 Bloomberg L.P.