China's producer price index (PPI) posted its steepest fall in more than two years inDecember amid a slump in global oil prices and weak domestic demand.

The factory gate price, which measures inflation at the wholesale level, dropped 3.3 percent yearon year in December, the National Bureau of Statistics (NBS) said on Friday.

PPI dropped 2.7 percent in November, 2.2 percent in October, 1.8 percent in September and 1.2percent in August.

On a monthly basis, PPI contracted 0.6 percent in December, a slight acceleration fromNovember's 0.5 percent fall.

Yu Qiumei, a senior statistician with NBS, attributed the drop to the lower prices of refined oil; oiland natural gas; and chemicals, which contributed to a combined 0.4 percentage point fall in lastmonth's PPI reading.

In 2014, the country's PPI fell 1.9 percent year on year.

China's consumer prices grew 2 percent in 2014 from a year earlier, well below the government's3.5 percent target set for the year.

Deflation 'may force central bank's hand'

Further easing in consumer inflation and accelerating industrial deflation in November reflectstagnation in the world's second-largest economy, and that may push the central bank to cutbanks' required reserve ratios as a means of easing liquidity and stabilizing growth, marketobservers said on Wednesday.

They said that China's top leaders may discuss a reduction in the 2015 Consumer Price Indextarget to 3 percent, from 3.5 percent this year, during the Central Economic Work Conference inBeijing. A statement will be issued when the meeting ends on Thursday.

The comments followed a report by the National Bureau of Statistics, which said that the CPIedged down to 1.4 percent year-on-year in November from 1.6 percent in October, the lowestlevel since December 2009.

Warm weather and adequate supplies pushed food prices down 0.4 percent month-on-month.

The cost of items in the CPI basket other than food slid 0.1 percent from October, the first drop inthree months, as global oil prices weakened.

"Consumer prices may remain low, and the full-year CPI is expected to be 2 percent, much lowerthan the 3.5 percent target," said Lian Ping, chief economist at Bank of Communications Co Ltd.

"The CPI may continue to ease next year."

The NBS also said that the Producer Price Index sank 2.7 percent year-on-year in November, thelargest decline since July 2013. The index has been negative for 33 consecutive months－thelongest period of deflation in 30 years.

Deepening industrial deflation is difficult to curb in the short term, experts said, because theprices of raw materials, including oil and natural gas, may remain soft around the world.

Liu Ligang, chief economist in China at Australia and New Zealand Banking Group Ltd, said thatthe central bank is likely to cut required reserve ratios by year-end to curtail deflation risks.

"The weak PPI means Chinese enterprises are struggling amid the economic slowdown. Theirprofits will drop further as their debts surge," said Liu.

The People's Bank of China, the central bank, cut the benchmark interest rates in November. Butthe cuts were asymmetric, and deposit interest rates and interbank market rates remain high.

"That means the effect of the rate cuts is weak, and the central bank must cut the reserve ratiomore than once to ensure that the monetary policy is effective," Liu said.

He forecast three RRR cuts of 50 basis points each in 2015.

Strong headwinds from the property market correction, overcapacity in upstream industries andhigh local government debt are the main causes of the slowdown.

"Increasing deflationary pressure in China will push up real interest rates and compel more ratecuts," said Wang Tao, chief economist in China at UBS AG.

"We expect at least two more cuts in benchmark lending rates totaling 50 basis points by end-2015, and we see the central bank continuing to provide sufficient liquidity to keep the moneymarket rates low.

"Rate cuts are key in driving down debt service burdens, improving corporate cash flow andreducing financial risk by slowing the pace of nonperforming loan formation. We do not see thesemeasures as having a significant stimulative impact on credit and GDP growth," she said.