(Reuters) - China's annual consumer inflation hovered at a near five-year low of 1.5 percent in December, signaling persistent weakness in the economy but giving policymakers more room to ease policy to support growth.
The world's second-largest economy still faces formidable headwinds this year as a property market downturn persists and local governments and companies are struggling to repay debt.
"Deflation this year is definitely a risk," said Minggao Shen, economist at Citi in Hong Kong.
"We continue to argue that deflation provides more room for policy easing. Our best-case scenario is still two more rate cuts in the first half of this year and maybe three to four reserve requirement ratio cuts this year."
Analysts polled by Reuters had expected annual consumer inflation to be 1.5 percent in December, compared with 1.4 percent in November.
The consumer price index rose 0.3 percent in December from November, the National Bureau of Statistics said on Friday, in line with economists' expectations.
The producer price index in December declined 3.3 percent from a year earlier, its 34th consecutive monthly decline and the biggest decline since September 2012, as sluggish demand curbed the pricing power of companies.
The fall in PPI in December was largely because of fall in global oil prices, the bureau added.
The market had expected a 3.1 percent fall in producer prices after a drop of 2.7 percent in November.
Annual consumer inflation was 2 percent in 2014, well below the government's target of 3.5 percent. The producer price index fell 1.9 percent last year.
The People's Bank of China (PBOC) is widely expected to ease policy by cutting interest rates further or lowering reserve requirement ratios (RRR) for all banks, although some analysts believe it may be pausing on policy easing to wait for recent actions to take effect and lift growth.
It cut interest rates in November for the first time in more than two years to lower borrowing costs to support growth. Later, it loosened loan restrictions to encourage banks to step up lending.
China's annual economic growth likely slowed to 7.2 percent in the fourth quarter, the weakest since the depths of the global crisis, a Reuters poll showed, suggesting full-year growth will undershoot the official target and marking the weakest pace in 24 years.
The government is due to publish trade data on Tuesday and bank lending data any time next week, followed by data on fourth quarter GDP, industrial output, urban investment and retail sales data for December on Jan 20.