China's consumer prices will fall in February from a year earlier, but the falling year-on-year inflation doesn't mean deflation, Merrill Lynch said in a recent research report.

"We do expect CPI inflation to turn negative in Feb. 2009," the investment bank said. But it noted a falling year-on-year inflation doesn't mean that China will enter a deflationary period, it said.

"Both CPI and PPI inflation could decline further on higher bases due to the snowstorm and soaring energy prices last year," the bank said.

But prices of food, which accounts for one third of China's CPI, are rising month-on-month and overall price levels of raw materials are quite stable, it added.

China's consumer price index (CPI), the main gauge of inflation, rose 1.2 percent year-on-year in December, the eighth consecutive month of deceleration and the slowest rise since July 2006.

The CPI was 2.4 percent in November, and it hit a 12-year-high of 8.7 percent in February.

The producer price index (PPI), a measure of inflation at the wholesale level, fell 1.1 percent in December after rising 2 percent in November and a 12-year-high of 10.1 percent in August.

The retreat in inflation has prompted some economists to call for more government measures to avert a coming deflation, as it could raise real interest rates and discourage business investment to make the economic situation worse.

But there're diverged opinions. China faces deflationary pressure but not for long, government economist Wang Xiaoguang told Xinhua.

Deflation "isn't a problem, but a good thing this year. Price declines can spur demand," he said.

(Xinhua News Agency January 29, 2009)