China's consumer inflation rate in May was the slowest in two years, and the year-on-year industrial product prices dropped to a 30-month low, raising concerns about further economic contraction because of the weakening demand with a possible worsening of the European crisis.

Inflation is expected to ease more in the coming two months, which will invite additional macroeconomic policy fine-tunings to stress priority of stabilizing growth, analysts said.

The country's consumer price index (CPI), a main gauge of inflation, slowed to 3 percent last month from a year earlier, the lowest since July 2010. The figure was 3.4 percent in April and 3.6 percent in March. The National Bureau of Statistics released the new data on Saturday.

Last month, the CPI decreased by 0.3 percent from a month earlier, and it was lower than the market's prediction of 3.2 percent.

"The inflation downturn is likely to be prolonged and it may fall to less than 3 percent in June," said Wang Yuwen, an economist with the Finance Research Center of the Bank of Communications.

Food prices, which account for about 30 percent of the weight in the calculation of CPI, increased 6.4 percent in May year-on-year, compared with 7 percent in April, contributing about 2 percentage points of the inflation, according to the NBS.

The pork price, regarded as one of the most important indicator of food prices, dropped for the first time in two years, by 0.6 percent. Vegetable prices declined by 6.9 percent from April, the NBS showed.

Li Daokui, a former adviser to the central bank's monetary policy committee and a professor at Tsinghua University, said on Saturday that the easing food prices contributed the most to the decrease in inflation.

"In the next five months, the year-on-year CPI may stay around 2.6 percent, with a full-year expectation of 3 percent, providing more space for the macroeconomic policy fine-turning as well as supporting the interest rates and resource price reforms," Li said, adding that now is the "best chance" in many years.

On Friday, the government cut gasoline and diesel prices to curb the faster-than-expected slowdown in the economy.

The producer price index (PPI), which reflects industrial inflation, sharply dropped by 1.4 percent from a year earlier, compared with a forecast of a 1.1 percent drop. This indicates that the inflation pressure of the raw- material cost is continually easing amid the decreasing global commodities' prices, said Qu Hongbin, chief economist in China with HSBC Holdings PLC.

The lowering production prices was in line with the unexciting growth of industrial output in May, a slight increase to 9.6 percent from 9.3 percent in April, the second month of single-digital growth after the country show at least 10 percent expansion for about three years, according to the NBS.

In the first five months this year, fixed-asset investment, which is seen as the strongest force to drive the country's economic growth, increased 20.1 percent compared with the same period last year. The growth pace was 0.1 percentage points lower than that for the first four months, the NBS said.

Qu said he expected more cuts of the reserve requirement ratio for commercial banks in the second half to hedge the rapidly decreasing yuan position for foreign-exchange purchases thanks to weakened overseas demand. "Another four cuts [totalling] 200 basis points in the next six months may be necessary."

Economists on Saturday said they expect more loosening economic policies to prevent an uncontrollable contraction in the next a few months after the People's Bank of China said it would reduce interest rates on Thursday.

The central bank lowered the one-year benchmark interest rates by 25 basis points, the first decrease since the end of 2008, signaling that a cycle of easing monetary policy may start.

Li Daxiao, head of research at the Shenzhen-based Yingda Securities Co Ltd, said that people should not worry about a deflation risk in China, as additional fine-tuning policies can be expected to take effect in the second half.

"The share market also has an optimistic outlook based on the likely economic rebound," he added.

Instead of the current domestic situation, the most dangerous risks for the world's second largest economy are coming from the outside, David Lipton, first deputy managing director with the International Monetary Fund said on Friday in Beijing.

Uncertainties in the face of a deepening European crisis could limit exports from China in the near term, according to Lipton.

"We agree that it was critical not to lose sight of the top medium-term priority of transforming China's economy to a more consumer demand-based growth model," which is expected to boost living standards and contribute significantly to strong and balanced global growth, he said.

In May, the total volume of the social retail sales was 1.67 trillion yuan ($265 billion), with a nominal growth rate of 13.8 percent from a year earlier, slipping from 14.1 percent in April and 15.2 percent in March, based on the data showed by the NBS.

"The reform process should go faster to avoid a further build-up of risks, and produce a smooth and controlled adjustment to consumer-based growth," Lipton said.

chenjia1@chinadaily.com.cn