China's annual inflation rate fell sharply in October to 5.5% in a further pullback from July's three-year peak, giving Beijing more room to fine tune policy to help an economy feeling the chill of a global slowdown.
Inflation fell from 6.1% in September and marked the third straight decline since a peak of 6.5% in July, bolstering expectations that price pressures were on a solid downtrend.
Premier Wen Jiabao said prices had fallen further since October, adding to the view that policymakers will edge towards more pro-growth policies, although inflation is still too high to expect a cut in interest rates.
The inflation figures soothed investors concerns about a sharp slowdown in China, supporting oil prices and underpinning Chinese shares, although market direction is being largely set by events in Europe.
The 5.5% rise in the consumer price index in the year to September was bang in line with expectations from a Reuters poll.
Producer price inflation also showed a marked slowdown to 5.0% in October, a one-year low, from 6.5% in September. The median of a Reuters poll had forecast an October reading of 5.7%.
Economists said the combination of figures suggested the forecast that consumer inflation would drop to 4.6% in December may now be too high.
Indeed, Wen suggested prices had continued to fall.
"Since October, overall domestic prices have been falling noticeably," Wen was quoted as saying by a government website. "Prices of pork and eggs have fallen, but prices of fruit, dairy products, beef and mutton remain at high levels," he said.
China's leaders have begun talking in recent weeks about "fine tuning" macroeconomic policy to maintain economic growth, which slowed in the third quarter to 9.1%, its weakest in more than two years.
But they have also made it clear that stabilising prices and fighting inflation remain the top priority, so analysts rule out a rate cut or reduction in bank reserve ratios anytime soon.
Most evidence of the fine-tuning has so far been seen through tweaks to tax policy aimed at small and medium-sized businesses and some signs that bank lending to that sector of the economy — which supports 75% of China's jobs — could be relaxed.
"The best way of controlling price rises is to boost production," said Wen.
The premier also said Beijing would not loosen policies to rein in the red-hot property market, a report on the official Xinhua news agency said.
Wen said the construction of government-subsidised housing projects would help relieve some supply strains and ease housing inflation.
The latest data showed that food prices, a major source of inflationary pressure in China, rose 11.9% in October from a year earlier, the smallest annual increase since May.
But they fell 0.2% from September, the first decline since May.
RISK OF IMMINENT EASING
While most analysts rule out an immediate cut in interest rates, there is more debate on when the central bank might reduce bank reserve ratios. At 21.5%, the RRR (required reserve ratios) is at a record level for big banks.
Analysts at ANZ believe the economy is deteriorating so quickly that the PBOC could soon start to ease policy by reversing some of the nine hikes to RRR made in the tightening cycle that began in October 2010.
Annual economic growth rates have fallen for three straight quarters. Analysts forecast growth would slow to less than 9% next year for the first time in a decade.
The country's big manufacturers ran at their slowest pace in October since early 2009, the latest private-sector survey of purchasing managers showed, though there were signs of smaller firms bouncing back and a sharp fall in factory-gate prices.
Some interpretation of conditions in the real estate market could be made by 0530 GMT when fixed asset investment (FAI) data are released. Real estate makes up about 20 percent of China's FAI, a primary driver of overall economic growth.
FAI growth is expected to have eased marginally to 24.7% in October from 24.9% in September and continuing a broad two-year trend of gradual cooling.
Industrial output figures, also due later on Wednesday, are seen showing a rise in October from the year earlier of 13.4%, easing from September and the weakest rate since May.
