BEIJING (Bloomberg) — China may impose temporary price controls to counter the fastest inflation in two years, the cabinet said.

Price caps on "important daily necessities" and production materials will be used if necessary, the State Council said on its website yesterday after a meeting chaired by Premier Wen Jiabao.

China's accelerating inflation has sent stocks and commodities sliding on speculation that efforts to curb prices will cool the world's fastest-growing major economy. The State Council's announcement came after the Shanghai Composite Index yesterday extended to 10 percent its decline from an almost seven-month high on November 8.

"This is about the strongest signal the government could give of its determination to slow price rises," said Mark Williams, a London-based economist at Capital Economics Ltd. and a former China adviser for the UK Treasury.

"Whether or not controls end up being widely implemented, the government will hope that the mere fact of the announcement will help to rein in inflation expectations."

The cabinet also pledged to stabilise natural gas prices, crack down on speculation in agricultural goods and ensure the supply of vegetables, grain, cooking oil and sugar. State television reported yesterday that the State Council was drafting measures to curb prices.

The MSCI Emerging Markets Index declined 1.1 percent to 1,088.83 as of 7.34am in New York yestersay, set for the lowest closing level since October 1.

McDonald's Corp., the world's largest restaurant chain, said yesterday that it has increased prices for its burgers, drinks and snacks in China to offset costs.

The central bank last month raised interest rates for the first time since 2007 as the government wrestles with inflation that accelerated to a 4.4 percent annual pace in October, mainly driven by food costs. Inflows of cash from trade and investors betting on Chinese growth and gains by the yuan threaten to fuel price gains.

Citigroup Inc. economist Ken Peng sees the central bank raising interest rates next month and said the government will also seek to limit credit growth after targeting 7.5 trillion yuan ($1.1 trillion) of new loans this year, 22 percent less than the record amount extended in 2009.

China in January 2008 temporarily froze prices for oil products, natural gas and electricity, as well as daily goods and school and transportation fees, to counter inflation that surged to the fastest pace in more than a decade. Shanghai's stock index plunged in 2008 after peaking in October 2007.

"It's feeling like the winter of 2007 all over again," said Gavin Parry, managing director of Parry International Trading Ltd., a stock trading desk in Hong Kong.

"The last time China enacted price controls, they ended the Shanghai bull market. The knock-on could be larger this time given the global focus on China."