A customer selects potatoes at a supermarket in Hefei, Anhui province, August 9, 2012. [Photo/Agencies]

BEIJING -- China's consumer inflation eased to its lowest rate in two and a half years in July, giving the government more leeway to loosen credit to spur the slowing economy.

The Consumer Price Index, a key gauge of inflation, grew to 1.8 percent year-on-year in July, the slowest rate since February 2010, the National Bureau of Statistics announced Thursday.

The rate was 0.4 percentage points lower than the figure for June.

The Producer Price Index, a main gauge of inflation at the wholesale level, fell 2.9 percent in July from a year earlier.

The easing inflation is believed to be a result of the base effect. The CPI growth rate hit a 37-month high of 6.5 percent in July last year before gradually retreating as China's economy slowed for eight quarters in a row.

Food prices, which account for nearly one-third of the prices used to calculate China's CPI, edged up 2.4 percent in July from a year ago, down from a growth of 3.8 percent in June.

Surging vegetable prices were the driving force for the CPI's growth. Rain and flooding affected vegetable production in many places during the peak supply season, pushing up vegetable prices by eight percent.

Pork prices fell 18.7 percent, dragging down CPI growth by 0.71 percentage points, NBS said.

Zhang Liqun, a researcher with the Development Research Center under the State Council, said abundant domestic agricultural production has helped stabilize prices. He called for more attention to be paid to severe ongoing droughts in the United States that are expected to impact China's edible oil and grain prices.

He said the CPI will continue to ease for the rest of the year and remain below three percent, well within the government's target of four percent for the year.

Although inflation has been relieved in the short-term, climbing costs will cause the CPI to surpass 2 percent before long, said Wang Jun, a researcher at the China Center for International Economic Exchange.

He also warned that deflation risks may arise if the government fails to effectively curb the economic slowdown.

Dwindling orders from Europe and other trade partners have sapped China's exports and, combined with a cooling property sector, slowed the country's economic growth rate to 7.6 percent in the second quarter, the lowest level since the first quarter of 2009.

To boost growth, the government has loosened the monetary supply, cut taxes for small businesses and encouraged private businesses to invest in sectors previously closed to them.

The central bank has cut its lending and deposit rates twice, lowered the amount of funds that banks must keep in reserve and is widely expected to further lower interest rates, as well as the reserve requirement ratio, in August.

China Economy by Numbers

Consumer prices in China

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