China said Tuesday its politically sensitive inflation rate hit a more than three-year high in July while other data indicated its attempts to cap rising prices was sapping economic growth.

The consumer price index rose 6.5 percent last month compared to a year earlier, the highest level since June 2008 when it reached 7.1 percent, the National Bureau of Statistics (NBS) said.

The July reading is likely to fuel concern among policymakers anxious about inflation's potential to trigger social unrest, and about instability in the Chinese economy at a time of renewed global financial peril.

The bureau also said output from China's factories and workshops rose by 14 percent year-on-year in July -- a slower rate than in June -- adding to concerns that the world's number two economy is slowing while prices continue to rise.

China has been struggling to tame inflation despite restricting the amount of money banks can lend on numerous occasions and hiking interest rates five times since October.

Food prices, which the bureau has said are likely to hurt low earners the hardest with foodstuffs accounting for more than one-third of the monthly spending of the average Chinese consumer, were up 14.8 percent in July.

Mounting public anger over rising food and fuel prices has already caused a series of protests this year.

This month, thousands of taxi drivers in the eastern city of Hangzhou went on strike to demand higher fares and in April, truck drivers in Shanghai stopped work over rising fuel costs, disrupting operations at the city's ports.

Some analysts are concerned the government might go too far in tightening monetary policy and trigger a sharp slowdown in the world's second-largest economy -- which could have dire consequences around the globe.

Alistair Thornton, an analyst with IHS Global Insight, said policymakers were being forced into a policy bind given accelerating inflation and a deteriorating global outlook.

"Policymakers could put on hold additional tightening measures that were previously in the works," he said.

"As we enter the final quarter, any further weakness in the US and eurozone would spark a broader easing of monetary policy," he said.

Premier Wen Jiabao reportedly admitted in June it would be difficult to keep inflation within Beijing's target for 2011 -- 4.0 percent -- but added fighting rising prices remained a priority and hoped to keep the level under 5.0 with "hard work".

But analysts said inflation was now close to a peak and forecast it would fall back later in the year as Beijing's efforts to curb prices kicked in.

"The encouraging thing about today's data is that headline CPI inflation is up only slightly this month after a big jump higher last month," said Brian Jackson, senior strategist at the Royal Bank of Canada.

The July rate was up 0.5 percent month-on-month, while CPI in June had risen 6.4 percent from the same month of 2010. In May, it rose 5.5 percent year on year.

"We think inflation is close to a peak and will head lower later in the year as base effects turn favourable and the impact of previous policy measures kicks in," Jackson said.

Ma Jun, a Hong Kong-based economist with Deutsche Bank, told AFP that Beijing might have to loosen its tightening policies, with growth in the West expected lower than previously forecast given the US and European debt crisis.

"The impact on China's CPI is obviously negative -- it will add downward pressures on CPI as international commodity prices are falling sharply," he said.

"Now the likelihood for a loosening is even bigger than expected, particularly in the fourth quarter."

Retail sales, the main gauge of consumer spending, were up 17.2 percent in July, the NBS said, while fixed asset investment, a measure of government spending on infrastructure, rose 25.4 percent in the first seven months of 2011.

Yao Wei, an economist with Societe Generale, downplayed concerns of a hard landing, but agreed that the government may start loosening policies if the slowdown unwinds faster than they expected.

"I think the growth remained robust in July but clearly the challenge is ahead," she said.

"We expect further deceleration in coming months. The export sector will definitely experience some headwinds."

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