China's annual consumer inflation slowed more sharply than expected to a seven-month low of 2.5 percent in December, easing market fears of tighter monetary policy rates although the central bank is tapping the brakes on bank liquidity.
Rising money market rates and bond yields indicate the People's Bank of China (PBOC) is tightening liquidity conditions, to reduce debt levels and contain credit growth, but there is little sign of a sharp turnaround in its policy stance.
The central bank has pledged to continue to maintain prudent monetary policy in 2014 and keep reasonable money and credit growth to support the real economy.
The drop in inflation last month, from November's print of 3 percent, was sharper than a fall to the 2.7 percent rate expected by the market, slowed by volatile food costs.
Food prices rose 4.1 percent in December from a year earlier, slowing from November's 5.9 percent rise, the National Bureau of Statistics said on Thursday.
But analysts warn inflation may quicken in coming months as the government pushes market-oriented reforms to liberalise energy and utility prices.
"While the CPI inflation came in lower than expected, the January figure will likely exceed 3 percent again due to the Chinese New Year effect," said Zhou Hao, an economist at ANZ in Shanghai.
"Inflation could exceed 3.5 percent in the second half of 2014, as upcoming pricing reforms could push up commodity and public utility prices. Therefore we think that CPI inflation will be 3.2-3.4 percent on average this year."
Graphic on China's CPI: link.reuters.com/waf95s
Month-on-month, consumer prices rose 0.3 percent versus 0.4 percent expected by economists.
China's inflation was 2.6 percent over the whole of 2013, well within the government's target limit of 3.5 percent, the bureau said.
The bureau also said that China's producer prices fell 1.4 percent last month from a year earlier - the 22nd consecutive month of decline - versus the same rate of factory price deflation in November.
The inflation news precedes December trade figures due on Friday and fourth quarter gross domestic product data due Jan 20.