China's inflation slowed sharply in October as food prices fell, official data showed Wednesday, fuelling expectations the government will relax its grip on bank lending and property purchases.

The country's consumer price index -- a key gauge of inflation -- rose 5.5 percent year-on-year, the National Bureau of Statistics said in a statement, marking the slowest pace since May when the inflation rate hit the same level.

Food prices, a major part of the basket of goods used to calculate inflation, fell 0.2 percent in October from September as the cost of vegetables and eggs dropped 3.4 percent and 3.8 percent month-on-month respectively.

China's inflation rate has slowed for three straight months after peaking at 6.5 percent in July -- the highest level in more than three years -- as policymakers clamped down on bank lending and property purchases.

But it is still higher than the government's annual target of four percent.

"The further fall in headline CPI is a good result for Beijing, and is exactly what policymakers have been trying to engineer over the last six to 12 months," said Brian Jackson, a senior strategist at Royal Bank of Canada.

While it was premature to expect a major policy shift, "the case is building for some more targeted moves", Jackson said.

Beijing, anxious about inflation's potential to trigger social unrest, has been pulling on a variety of levers to curb prices in the past year, including restricting the amount of money banks can lend and hiking interest rates.

The producer price index, which measures the cost of goods at the farm and factory gate, rose 5.0 percent year-on-year in October, but fell 0.7 percent from September, the statistics bureau said.

Chinese Premier Wen Jiabao said consumer prices had fallen "noticeably" since October but he warned "difficulties remain", according to a Xinhua report posted on the government's website.

The cold winter months were the peak period for consumer demand and were also the slack season for vegetable production in the country's north, Wen said during a recent visit to Russia.

Chinese shares closed up 0.84 percent.

Despite lingering concerns over inflation, analysts expect authorities to ease credit restrictions in the coming months as Europe's debt crisis squeezes demand for Chinese exports and small businesses struggle to get financing.

Output from China's millions of factories and workshops rose 13.2 percent year on year from January to October, slower than the 14.2 percent growth recorded in the first nine months of the year.

Growth in fixed asset investment in the 10-month period was steady at 24.9 percent while retail sales rose 17.2 percent on year in October.

Visiting the northern port city of Tianjin last month, Wen repeated that controlling prices was a key task but he also said the government could alter economic policy when the time was right.

"As inflation worries ease, the room for fine-tuning monetary tightening is getting bigger," said Lu Ting, an economist at Bank of America-Merrill Lynch.

"Policymakers might still put taming inflation as a top priority, but we will see policies to be increasingly nudged towards pro-growth."

Analysts said policymakers were likely to reduce the reserve requirement ratio -- the portion of deposits banks must set aside -- in the coming months to spur lending, but they ruled out a change in interest rates.