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China's inflation eases, giving room for stimulus

BEIJING (AP) — China's inflation fell further in May, giving Beijing more room to fight a deepening economic slump following this week's interest rate cut.

Consumer prices rose 3 percent, down from April's 3.4 percent rate, while politically volatile food price inflation eased to 6.4 percent from the previous month's 7 percent, data showed Saturday. The government's target is 4 percent for the year.

That reduces the risk Beijing might set off more price spikes as it unveils new measures almost daily to reverse a downturn that raises the threat of job losses and unrest. The slump comes at a sensitive time for the ruling Communist Party, which is preparing to hand power to a younger generation of leaders this year.

"Receding consumer price inflation frees up much-needed space for policymakers to loosen credit and roll out investment plans," IHS Global Insight analyst Alistair Thornton said in a report.

Growth in the world's second-largest economy fell to a nearly three-year low of 8.1 percent in the first quarter. Analysts expect it to decline further before a possible rebound late this year.

The government cut interest rates Thursday for the first time in nearly four years and cut gasoline and diesel retail prices on Friday. It has promised to pump money into the economy with spending on low-cost housing, airports and other projects.

Analysts said the rate cut suggested authorities might have been spurred to greater urgency because May trade and industrial data, also due out this weekend, might be even weaker than pessimistic forecasters expected.

Worsening strains in Europe, China's biggest export market, "highlight the significant downside risks to the outlook," said David Lipton, a deputy managing director of the International Monetary Fund, in a written statement during a visit to Beijing.

"China again has space for a forceful response if necessary," Lipton said.

Communist leaders spent two years tightening lending and investment curbs to cool an overheated economy after its rebound from the 2008 crisis. Inflation climbed to a three-year peak of 6.5 percent last July before declining.

Beijing started to reverse course late last year after a plunge in global demand battered exporters. Communist leaders have moved cautiously after their huge stimulus in response to the 2008 crisis fueled inflation and a wasteful building boom.

The May data still showed signs of price pressures, with the cost of fresh vegetables rising 31.2 percent over a year ago.

May wholesale prices fell for a second month, declining 1.4 percent compared with the same month last year. That suggested factories and other suppliers have a glut of goods and must cut prices charged to retailers.

"China's producers are seeing sharp deflation, pointing to a worrying lack of final demand," said Thornton. "Both should act as a spur for the government to move more aggressively."

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