Morgan Stanley said recent food price declines are likely to drag China's consumer price index (CPI) inflation to 7.6-8.0 percent in May, down from 8.5 percent in April and a near-12 year high of 8.7 percent in February.

Citing the Ministry of Commerce's latest survey data, Morgan Stanley said weekly falls in prices of vegetables and meat were more than enough to offset a rise in eggs and flat prices of grain and cooking oil.

Vegetable prices in the third week of May dropped 5.6 percent week-on-week, meat was down 0.3 percent, and eggs were up 1.7 percent, Morgan Stanley said in a note.

"Comparing prices month-to-date in May with the average level in April, vegetables are down 19.5 percent, and meat softened by 0.3 percent, against the 2.5 percent rise in eggs, and 0.3 percent increase in grain and cooking oil," it added.

Rising food prices have been the principal cause of inflation reaching the highs of recent months.

Morgan Stanley said inflation in China should gradually ease over the rest of this year as domestic supply improves and international prices stabilize. But it warned that the devastating earthquake in Sichuan province earlier this month could fuel more upward pressure on prices in the short-term.

"In the absence of any further major natural disasters, China inflation should ease gradually over the course of the year," it said.

(China Daily via Agencies May 28, 2008)