BEIJING (AFP) -- China‘s inflation rate slowed sharply in February and factory output eased, data showed Friday, adding to evidence of a slowdown in the economy and giving Beijing more room to relax credit limits.

The figures from the National Bureau of Statistics come as the economy faces headwinds over Europe’s debt crisis and sluggish growth in the United States, which are hurting export-driven China.

The consumer price index rose 3.2 percent in February -- the lowest since June 2010 -- compared with 4.5 percent in January, when spending before the Chinese New Year holiday drove up retail prices, the government said.

Before January, inflation had eased for five straight months after hitting a more than three-year high of 6.5 percent in July and analysts had expected the downward trend to resume in February as the economy continued to slow.

Premier Wen Jiabao, speaking at the opening of the annual session of parliament on Monday, warned consumer prices remained high and the government‘s aim was to keep the inflation rate within 4.0 percent this year.

His remarks suggest policymakers will be cautious in relaxing the tight credit restrictions imposed in the past two years, while as he also forecast

2012 economic growth to slow further from the blistering pace of previous years.

The producer price index, which measures the cost of goods at the farm and factory gate and is a leading indicator of consumer prices, flatlined in February compared with a 0.1 percent increase in January.

Inflation has triggered social unrest in the past and senior leaders are anxious to keep prices of basic goods such as vegetables, meat and housing under control ahead of a once-a-decade power transition that begins later this year.

Beijing has twice lowered the banks’ reserve requirement ratio in the past three months, effectively increasing the amount of money they can lend, and analysts said they expect further such moves in the coming months.

But they ruled out aggressive interest rate cuts, especially against a backdrop of rising global oil prices, as they could fuel inflation in energy-guzzling China.

“We do not expect a big shift in policy settings in the near-term, with any move to ease liquidity conditions likely to take the form of further cuts in banks‘ reserve requirements,” said Brian Jackson of Royal Bank of Canada.

JPMorgan expects the inflation rate to slow to 2.8 percent by the third quarter, giving the government “wider scope to implement selective policy easing measures to counter the downside risks to growth”.

Other data on Friday showed industrial output rose 11.4 percent in the first two months of 2011, compared with a year ago. The figure was below December’s increase of 12.8 percent and analyst forecasts for 12.4 percent, according to Dow Jones Newswires.

Urban fixed asset investment expanded 21.5 percent in the first two months, compared with the same period last year, beating expectations for an increase of 19.0 percent.

Retail sales rose 14.7 percent in the two-month period.

Beijing combines the January and February figures for output, investment and retail sales due to distortions caused by the Lunar New Year holiday, which falls within the first two months of the year.

China has cut its economic growth target to 7.5 percent this year from eight percent last year, in an official acknowledgement that the export-driven economy is slowing as the eurozone crisis and slow pick up in the United States hurts demand for its products.

The Asian powerhouse expanded 9.2 percent last year, slowing from 10.4 percent in 2010, as global turbulence and efforts to tame high inflation put the brakes on growth.

The downward trajectory in consumer prices means inflation “can be safely relegated from the top spot of government concerns” as Beijing turns its focus to boosting growth, said Alistair Thornton, an analyst at IHS Global Insight.

But he noted the “tricky” challenge facing policymakers as they try to ensure the economy expands at a fast pace while keeping prices under control.