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Chinese inflation cools to 4.2%

	A Chinese woman inspects a bottle of chilli sauce at a supermarket in Yichang, central China's Hubei province on November 9, 2011.

Story highlights

  • Chinese consumer inflation fell in November to 4.2% from a year earlier
  • Steep decline from 5.5% in October and well below July's three-year peak

Chinese consumer inflation fell in November to 4.2 per cent from a year earlier, a steep decline from 5.5 per cent in October and well below the three year peak recorded in July.

Controlling surging prices has been the main economic policy goal for the Chinese government since the start of the year but November's reading will provide Beijing with greater leeway to prop up slowing growth.

The Chinese manufacturing sector contracted last month for the first time in nearly three years and export growth to Europe and the US, China's two largest trading partners, has dropped off in recent months.

"With inflation moderating, the government has begun to express more concern about potential disruption from economic trouble in the US and Europe," said Jing Ulrich, managing director at JPMorgan.

The 4.2 per cent annual rise in the consumer price index last month was below most analyst expectations and the lowest reading since September 2010.

Prices actually fell slightly from October, with the CPI posting a monthly decline of 0.2 per cent, while the yearly rise in politically sensitive food prices dropped to 8.8 per cent in November, compared with 11.9 per cent in October.

    The CPI hit a three-year high of 6.5 per cent in July but has been gradually softening since then.

    In a sign that prices are set to come down further, the producer price index slowed even more dramatically, increasing just 2.7 per cent from a year earlier, compared with a 5 per cent rise in October and the smallest yearly increase since December 2009.

    Another key concern for Beijing is the real estate sector, where a government-induced slowdown shows signs of hitting headline growth as developers halt or postpone new construction.

    Real estate construction directly accounted for one quarter of total investment and around 13 per cent of China's GDP last year.

    The government set a full-year target this year of 4 per cent annual inflation and repeatedly raised interest rates and the portion of deposits banks must hold in reserve in an attempt to bring prices under control.

    While it is expected to miss the 4 per cent target by a wide margin, most analysts believe inflation has been tamed and Beijing's focus has switched to supporting growth.

    Last week, the central bank cut the reserve requirement for banks for the first time in three years in what most analysts said was the start of a new round of monetary easing aimed at keeping the economy steaming ahead at an annual rate above 8 per cent.