China's annual inflation rate tumbled in November to 4.2 per cent, the lowest level in more than a year, fuelling expectations of further monetary policy easing to combat deteriorating domestic and international economic conditions.

The rate is now close to the government's official target of 4 per cent and has dropped rapidly since hitting a three-year high of 6.5 per cent in July.

"The numbers confirmed that inflation is easing quickly in China," said Hua Zhongwei, an economist at Huachuang Securities in Beijing.

"As such, China's policies have to shift to the pro-growth side in a stronger and quicker way."

Most of the 22 economists quoted in the benchmark Reuters poll clustered their forecasts in a tight range of 4.2-4.6 per cent, producing a median expectation of 4.4 per cent.

The inflation level is the lowest since September 2010.

Inflation running well above the government's official 4 per cent target for 2011 had forced Chinese planners to keep monetary policy tight, even as evidence grew that the real economy -- especially private businesses that create most new jobs -- was being starved of credit at affordable rates.

But moderating price pressures, as well as easing money supply pressure, allowed the People's Bank of China on the last day of November to announce a cut in the ratio of reserves banks must hold, a clear signal of a policy shift after a two-year tightening campaign.

It was the first RRR cut in three years and came into effect on Dec 5.

"We expect the central bank to lower the RRR four more times next year," said Dongming Xie, an economist at OCBC Bank in Singapore.

Inflation rates will help determine how much room the central bank has to further cut reserve rates and unleash up to 16 trillion yuan tied up in the banking system.

"The real question is what's happening with inflation. If it remains relatively high and they can't open those reserves as much as they'd like to, then we start pushing up the liquidity constraints in the banking system," Charlene Chu, of Fitch Ratings in Beijing, said ahead of the data.

China's government -- which ultimately sets monetary policy -- is constrained by inflation as rising prices have a history of spurring social unrest. A big injection of cash could easily reignite sharp price rises.

Slowdown Spreading

Other data due later on Friday, including industrial output and retail sales, is expected to demonstrate the slowdown in the domestic economy, which bodes ill for China's efforts to turn to its home market as European and American demand for its exports weaken.

Annual retail sales growth is estimated to have weakened to 16.9 per cent in November from 17.2 per cent in October and 18.7 per cent in November 2010.

Industrial production growth likely slowed to 12.8 per cent from more than 13 per cent in data the month before. The country's official purchasing managers' index showed that factory activity in November shrank from October.

As fewer factories competed for raw materials, the rise in input costs also eased, providing cold comfort for those still operating.

The inflation data showed that producer prices in November rose just 2.7 per cent from a year earlier, well below forecasts for an increase of 3.3 per cent, and almost half the 5.0 per cent pace seen in October.

The softening in producer price pressures comes despite stronger oil prices, which are about 15 per cent higher in dollar terms now than they were a year ago.

By contrast, the price of iron ore, a commodity whose value has been primarily driven by China's gargantuan demand for steel over the past decade, is down by over 20 per cent compared with a year ago.

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