Cooling measures are taking effect on industry

Annual inflation was up from 5% in June and 4.4% in May, with analysts saying the figure is now close to peaking.

Food costs are rising, but prices for most manufactured goods fell because of competition and overcapacity.

Prices fell 0.2% month-on-month in July, suggesting the central bank may not need to put up interest rates.

Cooling growth

There have been recent signs the state is managing to rein in the economy.

The latest figures show gross domestic product expanded by 9.6% in the year to June, decelerating from 9.8% in the first quarter.

China has so far avoided raising rates to cool growth, a move which could make it harder for state firms to repay their debts.

Instead, the financial authorities have curbed lending and investment projects, particularly in the property and car-making sectors.

'Industrial slowdown'

China's central bank warned earlier this week that inflation was likely to accelerate in the third quarter, before slowing in the last three months of the year.

Chris Leung, an economist at DBS Bank, says he does not expect interest rates to rise as the economy slows.

"Economic cooling measures are taking effect, with industrial production, fixed asset investment, money supply and loans growth all slowing down.

"But we may see a situation where inflation remains sticky at 5%, while the economy slows. This scenario will probably persist for the next three to four months."