China's inflation pulled back in August from a three-year high while economic activity slowed, underlining expectations that the central bank can hold off on further tightening of monetary policy in the face of a global economic slowdown.

Still, the central bank is far from easing policy. Analysts said inflation, which fell to 6.2 percent in August from 6.5 percent in July, will remain elevated for several months and well above the government's target of 4 percent.

In addition, policy easing could fuel the risk of asset bubbles that could destabilize the economy.

The August price data is unlikely to persuade Beijing to change its current policy stance. In an ideal scenario, Beijing should ease its monetary policy now, but I don't think the government would do so, said Tang Yunfei, economist at Founder Securities in Beijing.

However, if the European debt crisis worsens sharply, the Chinese government may become less hesitant to loosen monetary policy.

The slowdown in inflation, helped in part by favorable comparisons against a year ago, was in line with forecasts of economists, who argue that inflation has peaked or will soon.

Producer price inflation slowed to 7.3 percent in August from 7.5 percent in July, the National Bureau of Statistics said on Friday.

Premier Wen Jiabao and other leaders have repeatedly stressed that wrestling inflation remains the top policy priority even though a flurry of measures from rate rises to increases in bank reserves requirements to tighten monetary conditions have dragged on economic growth.

That position was reiterated shortly after the inflation data by Li Daokui, an adviser to the central bank, who said the PBOC needed to maintain its prudent monetary policy.

But policymakers are treading cautiously for fear of slamming the brakes too hard on economic growth, analysts say.

Food prices, which jumped 13.4 percent in August from a year earlier, contributed 4 percentage points to August's inflation level. Non-food inflation in August rose to 3.0 percent from 2.9 percent in July.

My first take is that the easing in consumer inflation was not broad-based in August. The main contribution is a moderation in pork price rises, said Ren Xianfang, an economist at IHS Global Insight in Beijing.

So China still faces pretty high inflationary pressures.

The consumer price index rose 0.3 percent in August from the previous month, after a 0.5 percent rise in July. The figure is not seasonally adjusted.

SOFT-LANDING

After economic growth of 10.4 percent for all of 2010, the rate of expansion eased to 9.5 percent in the second quarter.

Other data released on Friday suggested economic growth continued to ease in August, but domestic demand held up relatively well.

Industrial output rose 13.5 percent in August from a year earlier, slowing from 14 percent in July. Retail sales growth eased to 17.0 percent from July's 17.2 percent.

Fixed-asset investment, a primary driver of the country's economic growth, rose 25.0 percent in the January-August period from a year earlier. That also marked a moderation from 25.4 percent in the first seven months.

Export data due on Saturday will provide a glimpse of how China's economy is weathering the drop in global demand.

Friday's figures helped soothe long-running investor fears of a hard landing in the world's second-largest economy.

These are some good numbers. It means a soft landing in growth, Ting Lu, China economist at Bank of America-Merrill Lynch, said in a note to clients.

Some government economists have forecast growth will keep slowing to below 9 percent in 2012, arguing Europe's debt crisis and weak U.S. demand will weigh on China's exports.

The People's Bank of China has raised interest rates five times and lifted banks' reserve requirement ratios (RRR) nine times since October.

The policy steps have cooled credit growth, one of the root causes of price rises, but have also saddled many smaller firms with higher costs that have eroded already-thin profit margins.

NO POLICY EASING FOR NOW

Lu at Bank of America-Merrill Lynch noted speculation that China might relax monetary policy given U.S. and European debt worries, but suggested these hopes were premature.

We think it's too early to call for monetary easing, such as a system-wide RRR cut, rate cut or a bigger loan quota, because Beijing got big lessons from the extremely loose monetary policies in 2009-2010, he said.

Price pressures in China are widely expected to cool gradually toward the end of 2011 as economic growth slows, but not fast enough to meet the government's full-year inflation target of 4 percent.

Prices of pork in China, a major factor behind inflation pressures, will continue to rise through the end of the year as supplies remain tight and feed costs increase, a senior industry official said on Thursday.

A minority of analysts say the tightening is, in fact, not over and they expect the central bank to raise interest rates once more before the end of 2011.

One argument in support of that view is that returns on bank deposits are too low, encouraging Chinese to risk their capital in the property and stock markets and raise the risk of asset price bubbles.

One-year bank deposits pay 3.5 percent, so real rates are deeply negative.

It is necessary for the central bank to raise the policy rate gradually to narrow negative real interest rates, Li-Gang Liu, China economist at ANZ in Hong Kong, said in a note.

(Additional reporting by Li Ran, Langi Chiang and Koh Gui Qing; Editing by Ken Wills)

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