The consumer price index (CPI), a major gauge of inflation, rose 1.8 percent year on year in July, the slowest since February 2010, the National Bureau of Statistics said on August 9.

The cooling inflation is attributed to three elements. First, inflation is easing worldwide. China's CPI growth began dropping after reaching a peak of 6.5 percent in July 2011. As a result of the sluggish economy in the United States and the European Union and continuously slipping international commodity prices, global consumer prices also fell in the first half of 2012. Second, the CPI growth in July 2011 is the highest in this round of inflation, making the base number quite large and ending up with a moderate year-on-year increase in July. Finally, we should never forget the contribution of pork prices, which declined 18.7 percent year on year in July, bringing the CPI down by 0.71 percentage points.

In a sharp contrast with the retreating CPI growth, ordinary people don't feel that prices have dropped substantially. Even in the supply peak season, the prices of vegetables and cooking oil have risen. The declining CPI growth is not equal to price decline as the figure can hardly reflect real price changes.

The 1.8-percent increase in July may mark the lowest point in 2012 and the CPI growth will gradually rebound in the coming months.

On a monthly basis, the CPI increased 0.1 percent in July, ending a monthly fall that has lasted for three consecutive months. Despite the fall of transportation and communication prices, seven out of eight categories in the CPI basket have witnessed year-on-year increases. Meanwhile, year-on-year increases of the CPI in August, September and October will be higher than that in July, since the base numbers are relatively lower.

Pork prices are bound to pick up. Pork prices have fallen below the break-even point and the country has started to purchase pork reserves. Statistics show that pork prices picked up in August. Alongside the decline of output, pork prices are much likely to rebound in the second half of 2012.

To sustain economic growth, the monetary policy might be further loosened. In the first half of 2012, 4.68 trillion yuan ($735.7 billion) was injected into the market and it's widely estimated that at least the same amount will be injected in the second half.

Prices of international commodities and food are also likely to pick up in the second half of this year. The oil price is edging up now. Affected by the drought in the United States, international grain price hike will affect grain prices in China.

If China's macro-economy, the manufacturing sector in particular, doesn't rebound and the CPI growth rises above 3 percent in the second half of 2012, stagflation will appear.

As economic growth slows, more money will be printed to spur the economy. The injected

currencies won't go to real economy because of the already existing overcapacity, but will only push up consumer prices.

There are, of course, some policy instruments we can use to prevent a stagflation: tax cut, income distribution reform, earmarking more budget surplus in public services such as pension and medical services, and giving private capital access to all profitable sectors.

This is an edited excerpt of an article by Ma Guangyuan, a renowned business commentator, recently published in National Business Daily