This shows the country's policymakers are more worried over a possible slowdown of the economy now because the weakening global demand has already dealt a blow to its exports sector.

That's why, analysts said, the government raised tax rebates for textile exporters and loan quotas for domestic firms earlier this month after the GDP growth slowed down to 10.5 percent in the first half.

Citigroup's economist Ken Peng said a falling CPI could mean another increase in fuel prices after the Olympic Games because the government control of fuel prices and electricity tariff was meant to curb inflation.

The factory gate inflation, however, has continued to soar, with producer price index (PPI) jumping to a 12-year high of 10 percent in July.

Coal prices have more than doubled in the past year, and existing electricity charges are 30 percent lower than what they should be, Standard Chartered economist Stephen Green said.

The CPI would remain under pressure in the second half of the year, he said, because energy tariff could be adjusted closer to the market levels. That could make the annual inflation rate hover around 6.5 percent.

Sun Mingchun, however, said the CPI would fall below 6 percent in August and continue its drop during the rest of the four months of the year because of the government measures to boost agricultural production.

"Falling inflation shows the government's macro-tightening measures have been effective, which will reduce investor fears over the possibility of policy missteps and increase the chances of a shift to targeted pro-growth policies," Jing Ulrich, JPMorgan Chase's chairwoman for China equities, has said.

Zhang Xiaojing, an expert with the Chinese Academy of Social Sciences, attributed the CPI decline to falling food prices and shrinking demand abroad.

Despite the fall, however, it would be difficult to keep the annual CPI growth below the government's target of 4.8 percent, he said.

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