China's inflation eases to 29-month low

While the slowing CPI bodes well for consumers, it ignited fears of deflation, as many believe macro-economic data for June that is due for release on Friday will point to a further slow-down of the world's second-largest economy.

Over the weekend, Premier Wen Jiabao said during an inspection tour of East China's Jiangsu province that China's economy is running at a generally stable pace, but there is still huge downward pressure. He called for more aggressive efforts to preset and fine-tune economic policies.

Li Changan, a professor with the University of International Business and Economics, presented a more optimistic view, however, arguing that it is too early to say the economy has fallen into deflation, considering the CPI still remained at a positive level.

But with a faster-than-expected slowdown of the economy, policy fine-tuning is badly needed, the professor warned.

In anticipation of June's weak data, China's central bank announced surprise cuts in the lending and deposit rates on July 5, the second such move in less than two months to spur growth.

Liu Ligang, an economist with the ANZ National Bank Ltd, foresaw the central bank will slash the reserve requirement ratio by 50 basis later this month and another 100 basis point in the rest of the year.

Although CPI was cooled down, analysts said it could not guarantee the elements for price rebound have been fully brought to bear.

Liu Shucheng, a researcher with the Chinese Academy of Social Sciences, noted attention should be paid to the upward pressure of production costs, which will exert influence in the long-run.

As the escalating costs in labor, raw material, land, resources and environment pile up, the government should properly direct the policy with an aim of boosting growth but not reigniting a lending spree and excessive government-led investment, suggested Zhu Baoliang, a researcher with the State Information Center, a government think-tank.

Zhang Liqun, of the Development Research Center of the State Council, or the central government, said the government should develop systems of vegetable planting and smooth logistic chains to keep food prices within a reasonable range.

"Maintaining stable consumer prices and economic growth is our long-term goal," he added.

China's stocks fell sharply on Monday as the lower-than-expected CPI data raised panic about deflation.

The benchmark Shanghai Composite Index dipped 2.37 percent, or 52.77 points, to end at 2,170.81 points.