By Nick Edwards and Langi Chiang
Other data, including figures showing industrial output in October grew at its weakest annual pace in a year, provided the latest evidence of a modest slowdown in the world's second-biggest economy.
Inflation fell from 6.1 percent in September and marked the third straight decline since a peak of 6.5 percent in July, bolstering expectations that price pressures were on a solid downtrend.
Premier Wen Jiabao said prices had fallen further since October, adding to the view that policymakers will edge toward more pro-growth policies, although inflation is still too high to expect a cut in interest rates.
"As inflation worries ease, the room for fine-tuning monetary tightening is getting bigger," said Ting Lu, an economist at Bank of America/Merrill Lynch in Hong Kong.
"Policymakers might still put taming inflation as a top priority, but we will see policies to be increasingly nudged toward pro-growth.
"That said, we don't expect a major change in monetary policy stance or some high profile moves such as cuts of policy rates and RRR (required reserve ratios)."
The inflation figures soothed investors concerns about a sharp slowdown in China, supporting oil prices and underpinning Chinese shares, although market direction is being largely set by events in Europe.
The 5.5 percent rise in the consumer price index in the year to September was bang in line with expectations from a Reuters poll.
Producer price inflation also showed a marked slowdown to 5.0 percent in October, a one-year low, from 6.5 percent in September. The median of a Reuters poll had forecast an October reading of 5.7 percent.
Economist Lu said the combination of figures suggested his forecast that consumer inflation would drop to 4.6 percent in December may now be too high.
Indeed, Wen suggested prices had continued to fall.
"Since October, overall domestic prices have been falling noticeably," Wen was quoted as saying by a government website. "Prices of pork and eggs have fallen, but prices of fruit, dairy products, beef and mutton remain at high levels," he said.
Industrial output rose in October by 13.2 percent from a year earlier, slightly below expectations for a 13.4 percent rise and the weakest pace since October 2010, suggesting factories were bearing the brunt of the economic slowdown.
Retail sales rose 17.2 percent, also slightly below expectations for a 17.4 percent rise. Fixed asset investment in January through October increased 24.9 percent from the same year-earlier period, topping expectations.
China's leaders have begun talking in recent weeks about "fine tuning" macroeconomic policy to maintain economic growth, which slowed in the third quarter to 9.1 percent, its weakest in more than two years.
But they have also made it clear that stabilizing prices and fighting inflation remain the top priority, so analysts rule out a rate cut or reduction in bank reserve ratios anytime soon.
Most evidence of the fine-tuning has so far been seen through tweaks to tax policy aimed at small and medium-sized businesses and some signs that bank lending to that sector of the economy -- which supports 75 percent of China's jobs -- could be relaxed.
"The best way of controlling price rises is to boost production," said Wen.
The premier also said Beijing would not loosen policies to rein in the red-hot property market, a report on the official Xinhua news agency said.
Wen said the construction of government-subsidized housing projects would help relieve some supply strains and ease housing inflation.
The latest data showed that food prices, a major source of inflationary pressure in China, rose 11.9 percent in October from a year earlier, the smallest annual increase since May.
But they fell 0.2 percent from September, the first decline since May.
"This indicates inflation pressure is indeed slowing," said Zhang Zhiwei, an economist at Nomura in Hong Kong, who said consumer inflation may drop below 5 percent in November.
"Lower inflationary pressure leaves room for further policy fine tuning. The PBOC has already marginally loosened liquidity by open market operations in October.
"We expect this type of fine-tuning to continue, but RRR and interest rates will be kept unchanged for the rest of 2011."
RISK OF IMMINENT EASING
While most analysts rule out an immediate cut in interest rates, there is more debate on when the central bank might reduce bank reserve ratios. At 21.5 percent, the RRR is at a record level for big banks.
Analysts at ANZ believe the economy is deteriorating so quickly that the PBOC could soon start to ease policy by reversing some of the nine hikes to RRR made in the tightening cycle that began in October 2010.
Annual economic growth rates have fallen for three straight quarters. Analysts forecast growth would slow to less than 9 percent next year for the first time in a decade.
The country's big manufacturers ran at their slowest pace in October since early 2009, the latest private-sector survey of purchasing managers showed, though there were signs of smaller firms bouncing back and a sharp fall in factory-gate prices.
"We revise our 'selective' policy easing call to an 'outright' policy easing, meaning that in an imminent move, the PBOC will likely make a 50 basis point cut to the RRR for all banks, with a possible larger cut of 100 bps for small and medium-sized banks," ANZ said in a note to clients last week.
The bank cites signs of softness in the real estate market as being particularly important, given that Chinese banks tend to prefer land and property as loan collateral.
Some interpretation of conditions in the real estate market could be made by 0530 GMT when fixed asset investment (FAI) data are released. Real estate makes up about 20 percent of China's FAI, a primary driver of overall economic growth.
FAI growth is expected to have eased marginally to 24.7 percent in October from 24.9 percent in September and continuing a broad two-year trend of gradual cooling.
A strong showing for FAI and retail sales -- also due at 0530 GMT -- would tend to support risk appetite as evidence of still strong domestic demand, assuring jittery investors that China is coping with a slowing global economic backdrop.
Industrial output figures, also due later on Wednesday, are seen showing a rise in October from the year earlier of 13.4 percent, easing from September and the weakest rate since May.
(Reporting by Nick Edwards; Editing by Kim Coghill and Neil Fullick)