China’s once-rampant inflation has cooled to its slowest pace is 22 months, opening the door for aggressive interest rate cuts that could potentially kick-start its economy back into high gear.

China’s consumer price index for November climbed 2.4% for the year, a sharp drop from the 4.0% posted in October and the fourth consecutive month-to-month drop, its National Statistics Bureau said today (Thursday).

Though not ideal for China’s overall economic growth, the silver lining is that falling consumer prices open a window to take a hatchet to the 5.58% benchmark interest rate, which would pump billions back into the economy and encourage banks to boost lending.

“A worst-case scenario for deflation would see producers cutting prices, suffering lower margins and slashing wages, which would eventually damp consumption,” Li Wei, an economist at Standard Chartered Bank Plc in Shanghai, told Bloomberg.

Clothing prices fell 1.7%, and transportation and communication prices fell 0.7% (lead by a 14.3% drop in fuel).

Food prices increased the most of all things measured, rising 5.9%, lead by higher prices for grain, fish and produce. That’s an encouraging sign, as food prices are a large part of China’s inflation dynamics.

China Quick to Act

What’s perhaps most striking about China’s slowing inflation is that it’s 180-degree turn from earlier this year, when consumer prices were rising as fast as 8.7% and officials were doggedly trying to temper one of the sharpest commodity run-ups in history.

Now, domestic demand has cooled – though not nearly as drastic as other major economies – and Chinese officials are pulling out all stops to prevent prices from trending into deflationary conditions.

Its most recent push: An ambitious economic stimulus that will pour $585 billion into housing, water-and-energy projects, airports, disaster relief and railroad construction over the next two years.

Other recent examples include its litany of Olympics investments, such as stadiums and arenas, hotels, restaurants, roads, and tourist attractions that also serve as new income streams.

This focus on developing jobs and infrastructure, or “new material product” – absent in any similarly focused U.S. stimulus so far – should keep China’s economy on the fast track, while also helping boost the Red Dragon’s ailing stock market.

Stocks have responded very well since the stimulus was announced Nov. 10, with the Shanghai index up nearly 19%.

Source: China Inflation Hits 22-Month Low, Slows to 2.4%