China's annual rate of consumer inflation ticked up to 2.0 percent in August from July's 30-month low of 1.8 percent, official data showed on Sunday, suggesting that room to ease monetary policy to shore up growth may be narrowing.
Economists polled by Reuters had forecast inflation to pick up to 2.0 percent in August.
Month on month, however, inflation was a touch ahead of forecasts, up 0.6 percent in August versus July. Analysts had anticipated a rise of 0.5 percent. Food inflation was up 3.4 percent on a year ago while non-food prices rose 1.4 percent.
"Inflation is coming back quickly. Together with rising home prices, it will limit the scope for further policy relaxation," said Dong Xian'an, economist with Peking First Advisory.
Separately, the National Bureau of Statistics said China's producer price index dropped 3.5 percent in August from a year earlier, which compared to forecasts for a 3.3 percent decline.
It marked the sixth straight month of producer price deflation, putting a further squeeze on corporate profits already dampened by a drop-off in demand at home and abroad courtesy of global economic headwinds stemming from Europe's sovereign debt crisis.
Investors widely expect the central bank to ease monetary conditions further as part of the government's campaign of "policy fine-tuning" unveiled in the autumn of 2011.
The People's Bank of China has cut interest rates twice since June and trimmed banks' required reserve ratios (RRR) in three 50 basis point steps since last November that has freed an estimated 1.2 trillion yuan ($190 billion) for new lending.
But a seeming recent preference for using money market operations over interest rates to boost liquidity conditions in the economy is seen as a sign of the policy dilemma facing a central bank and a government super hawkish on inflation and wary of aggressive rate cuts.
STICKY FOOD INFLATION
Food prices have eased sharply in 2012, but are still running at an annual rate of 5.9 percent so far - sticking above the government's overall inflation target of 4 percent.
That is especially pertinent to policymaking as most household income in China is spent on basic necessities. Average annual urban disposable income was 21,810 yuan ($3,500) in 2011.
Meanwhile average home prices in China's 100 biggest cities edged up for the third straight month in August, a private survey showed.
The modest 0.2 percent month-on-month uptick raises fears in some quarters that Beijing may bolster a two-year campaign to curb housing inflation, even though economists blame domestic economic sluggishness on property tightening.
The NBS will publish home price changes for August on September 18.
"With CPI rising off what should prove the bottom of the inflation cycle - up both year-on-year and month-on-month - it would seem, at first glance, to place the government in a bit of a quandary," analysts at IHS Global Insight wrote in a note to clients after the inflation data.
"They need further stimulus to revive growth, but have less room to absorb the inflationary pressure of that stimulus."
China's economic growth has slowed for six straight quarters and analysts expect the trend to extend to a seventh when third quarter GDP data for 2012 is published. Growth in Q2 was 7.6 percent, its slackest in more than three years.
Recent data have cemented views that growth for the full year will be its lowest since 1999 and may fall below 8 percent.
Officials last week revealed they had given the green light to 60 infrastructure projects worth more than $150 billion, as Beijing seeks to energise the economy. The announcement fuelled investor hopes the world's growth engine may get a lift in the fourth quarter of the year and beyond.
China's powerful economic planning body, the National Development and Reform Commission, announced approvals for projects that analysts estimate total more than 1 trillion yuan ($157 billion), roughly a quarter of the total size of the massive stimulus package unleashed in response to the global financial crisis in 2008.
Chinese President Hu Jintao urged Asia-Pacific nations on Saturday to speed up infrastructure development to help face the "grave challenges" from the global economy.
Fixed asset investment contributed 3.9 percentage points to China's 7.6 percent Q2 growth.
Qiu Xiaohua, former head of the National Bureau of Statistics and now a senior researcher with the China National Offshore Oil Corporation (CNOOC), told a forum in the city of Xiamen on Sunday that the government still had room to act to bolster growth - and urged it to do so.
"I think the government should accelerate the pace and further increase the strength of policy fine-tuning to give a lift to the economy," Qiu said, adding that he expected Q3 GDP growth to slow to 7.4 percent or less.
"If the government is quick to take proper measures to boost growth, the economy will start to stabilise and the GDP may pick up from the fourth quarter," Qiu said.
(Additional reporting by Aileen Wang in Xiamen; Editing by Sanjeev Miglani)