(Adds details, reaction)
By Simon Rabinovitch and Shen Yan
BEIJING, Nov 11 (Reuters) - Chinese inflation fell to a 17-month low of 4.0 percent in October, providing fresh evidence that policy makers need not worry about price pressures and can bend all their efforts to propping up growth.
The rise in the consumer price index, reported on Tuesday by the National Bureau of Statistics, was down from 4.6 percent in the year to September and was below market forecasts of 4.2 percent. It was the sixth consecutive monthly decline.
Indeed, inflation has fallen so rapidly from February's 12-year peak of 8.7 percent that some economists believe China could be battling to avert deflation before long, especially if a recent downturn in growth deepens, exposing surplus capacity.
"If prices stay at the current level, then price growth will turn negative by next April; if prices continue to fall at the current rate, deflation will be with us as early as February," said Hu Yuexiao, an analyst with Shanghai Securities.
"The increasing risk of deflation will make the central bank more aggressive in loosening monetary policy," he said.
China's cabinet on Sunday announced a shift to a moderately easy monetary policy, reinforcing expectations among economists that more interest rate cuts, on top of three reductions in borrowing costs since mid-September, are just a matter of time.
Food prices, which make up a third of the consumer basket, rose 8.5 percent in October from a year earlier, slowing from an increase of 9.7 percent in the 12 months to September.
Core inflation, which excludes food, moderated to 1.6 percent in the year October from September's reading of 2.0 percent.
"It shows that the Chinese economy is in a sharp slowdown -- production is falling, so is demand," said Zhang Yongjun, an economist with the State Information Centre, a government think-tank in Beijing.
MORE RATE CUTS COMING?
Prices in October alone fell 0.3 percent.
Jiang Chao, an analyst at Guotai Junan Securities in Shanghai, said he expected consumer inflation next year to average just 1 percent.
In some months, inflation could be zero, Jiang said.
"The possibility of deflation cannot be excluded," he said.
Kevin Lai, an economist with Daiwa Research Institute in Hong Kong, also expects much lower CPI readings in coming months, but he said the government's 4 trillion yuan ($586 billion) package of spending and investment announced on Sunday made an outright fall in prices unlikely.
"Given the massive stimulus measures coming through in the next few quarters, we'll see demand continue to be quite strong, picking up a lot of slack from the excess capacity," he said.
Lai agreed that the decline in inflation gave the People's Bank of China more room to cut rates.
"In fact, if they have a stimulus package that is so big, monetary policy has to accommodate that goal by creating more liquidity and by creating a more friendly monetary environment," Lai said.
For a graphic, please click on https://customers.reuters.com/d/graphics/CN_CPI1108.gif (Reporting by Zhou Xin, Simon Rabinovitch, Jerry Hua, Michael Wei and Shen Yan; Writing by Alan Wheatley; Editing by Ken Wills)