CHINA'S inflation slowed sharply last month with food costs easing under the tight monetary policies, allowing more room for changes in the country's firm grip on credit, analysts said.

The Consumer Price Index, the main gauge of inflation, expanded 5.5 percent from a year earlier in October, the National Bureau of Statistics said yesterday. It marked the third consecutive month of moderating inflation, and October's rate was the lowest since May. August's rate of 6.5 percent was a three-year high. In September, inflation still hung at 6.1 percent.

"The CPI growth cooled sharply as expected," said Lian Ping, chief economist at Bank of Communications. "The future slowdown may be faster than our previous projection."

Lian said earlier that the CPI may reduce to 4 percent in December and settle at 5.5 percent for the whole year.

Food costs, a major force in driving prices up in this round of inflation, jumped 11.9 percent year on year last month, down from 13.4 percent in both September and August. Prices of non-food items added 2.7 percent from the previous October, according to the statistics bureau.

Inflation pressure also eased further down the pipeline, with the Producer Price Index, the factory-gate measurement of inflation, cooling markedly to 5 percent in October from 6.5 percent a month earlier on a sharp correction in global commodity prices.

"The easing inflation provides more room for monetary policy flexibility," said Chang Jian, an economist at Barclays Capital. "But the possible change will remain selective because the slowdown is not sufficient for a broader easing."

Other analysts expected that even though a sharp change in monetary stance is unlikely, China may start easing by reducing the reserve requirement ratio, which now orders commercial banks to set aside a record 21.5 percent of their capital as reserves.

"We think the time is right for the authorities to first lower the rate to hedge against an increasingly uncertain external environment," economists with ANZ wrote in a report yesterday.

To combat price rises, China has lifted interest rates three times so far this year, along with six reserve requirement ratio increases. Such tightening measures managed to squeeze speculation out of the market as prices of ginger and onion, once wildly speculated, have returned to normal levels.

China's inflation expanded 5.6 percent annually in the first 10 months, still far exceeding the official target of 4 percent. But it was mild compared with other emerging markets like India, where inflation has remained above 10 percent in recent months.

"Cooling inflation allows China to strike a balance between inflation and growth," said Qu Hongbin, chief economist for China at HSBC. "However, it is still too early for a policy U-turn."

Premier Wen Jiabao said last month that China needs to fine-tune its macroeconomic policies to support troubled small firms and sustain steady growth. It was considered a signal for the country to loosen its grip on credit.

The nation's gross domestic product expanded 9.1 percent year on year in the third quarter, a slowdown from 9.5 percent second-quarter growth and 9.7 percent in the first three months.

China's economy is challenged by two main factors: a global slowdown, particularly in Europe and the United States, on which it depends for exports, and a cooling of the housing market, a secondary economic driver.

China's economy is unlikely to double dip but a slew of institutions have lowered their forecast for China's growth, including Standard Chartered, which estimated China's economy may expand 8.5 percent next year.

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