By Mark Magnier

BEIJING--Consumer prices in China decelerated last month while prices at the factory gate jumped more than expected, as earlier government pro-growth policies continued to steady the world's second-largest economy.

China's consumer price index rose 2.1% in December from a year earlier compared with 2.3% in November, the National Bureau of Statistics said on Tuesday. The key inflation reading matched market expectations. It was the first time in four months that the rate slowed, and the bureau said comparatively high prices a year ago weighed on the index.

The producer price index, meanwhile, rose 5.5% last month, compared with November's 3.3%, continuing the inflationary upswing that began in September after being stuck in a deflationary trend for more than four years. For all of 2016, producer prices dropped 1.4% on average from a year ago, while consumer prices rose 2.0%.

While consumer inflation remains below Beijing's targeted maximum of 3% in 2016, economists said that rising prices are likely to lead the central bank to continue its more recent cautious approach, after flooding the financial system with credit in early 2016 to boost growth.

"With inflation on an upward trend, this constrains the central bank's room to loosen monetary policy," said Standard Chartered Bank Ltd. economist Ding Shuang, adding that he expects the economy to remain stable in coming months.

After fretting about growth at the start of last year and doubling down on policies to boost the economy, China's leaders signaled last month they are shifting gears to try to deal with debt and high property prices and other potential speculative bubbles. Higher prices, in part fueled by speculation, complicate the government's task of managing the economy, economists said.

"While in Jan. 2016 the common fear was deflation and hard landing, now the concerns are inflation and financial risks," said Macquarie Group Ltd. in a research note.

Standard Chartered expects consumer inflation to average 2.2% this year, while UBS Group AG has a 2.3% forecast and Macquarie pegs it at 2.4%.

Expectations that inflation will move higher in coming months are being fueled by rising rental costs, after last year's sharp jump in housing prices in major markets, as well as elevated commodity prices. Raw-material prices rose 9.8% on year in December compared with 5.8% in November.

Consumer prices also are expected to rise this month ahead of the Lunar New Year holiday, or Spring Festival, which starts on January 28 this year, when Chinese spend lavishly on food, travel and entertainment.

In December, food and alcohol prices rose at a less rapid pace than in November, while nonfood prices accelerated, fueled in part by higher refined oil prices in China's controlled energy market.

Wang Quanjie, a 28-year-old Beijing civil servant, said vegetable prices at his local market have increased noticeably, prompting him to hunt for discounts. "I am trying to spend less on food by cooking myself and eating out less often," he said, while parking his electric scooter. "I could really use a raise, and food prices will keep rising with Spring Festival coming."

Inflation should stay contained over the medium term, however, said Capital Economics Pte, given more neutral monetary policy, overcapacity in manufacturing and, potentially, more job losses if state-owned companies follow through with planned layoffs to help reduce excess production capacity.

The recent rise in producer prices, ramped up infrastructure spending and a buoyant property market have boosted corporate profits and business confidence. The MNI China Business Sentiment Indicator rose for the second consecutive month in December to 55.9, its highest level in more than two years, from 53.1 in November. Industrial profits jumped 14.5% on year in November, up from October's 9.8%.

Liyan Qi contributed to this article.

Write to Mark Magnier at mark.magnier@wsj.com

(END) Dow Jones Newswires

January 09, 2017 23:04 ET (04:04 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.