China's consumer inflation fell in August to a 14-month low of 4.9 per cent, giving policy makers more room to pump up the world's fourth-largest economy if growth slows abruptly in coming months.
Markets, which had expected inflation to drop to 5.3 per cent from 6.3 per cent in the year to July, cheered the news.
Shanghai stocks recouped early losses of 1.5 per cent and were up 0.2 per cent in early afternoon on hopes that the central bank would ease its tight monetary stance.
"With these numbers we move much closer to the time when Beijing decides inflation is not an issue any more," said Stephen Green, head of China research at Standard Chartered Bank in Shanghai.
"There are increasing noises that this tightening policy has lasted too long, and more and more worries about growth skidding seriously."
Indeed, China reported a record trade surplus for August of $28.69 billion, but economists said the surprisingly strong figure was due to weakening domestic demand that sapped import growth. Forecasts for the surplus had centered on $23.5 billion.
Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said China had ramped up imports of everything from oil to consumer goods ahead of August's Olympics. Now the Games were over, so was that temporary fillip to demand, Lu said.
"Another reason is slowing economic growth, which is reducing China's demand for imports," he said. "In the next few months, import growth is unlikely to rebound as global oil and commodities prices are falling."
That bodes well for a further easing of price pressures, especially as economists expect food costs - the main cause of a leap in consumer price inflation to a 12-year high of 8.7 per cent in February - to keep rising much more slowly than last year.