The consumer price index (CPI), a key gauge of retail inflation, came in at 1.5 per cent, down from 2.3 per cent in November and also short of forecasts.
"The probability of a rate cut in the first quarter is high, and the closest window is this month," said Bruce Pang, from China Renaissance Securities Hong Kong.
CPI "will not be a concern in 2022" and the core measure, which strips out volatile food and energy costs, will stay muted below 1.5 per cent, he added.
Sheana Yue of Capital Economics said the current trends suggest inflation concerns are not likely to hold back the central bank from "further loosening measures including policy rate cuts".
Some commentators say the People's Bank of China could cut borrowing costs as soon as next week, marking the first since April 2020.
Surging inflation has caused a headache for policymakers as they tried to walk a fine line between trying to keep prices from running out of control while also trying to kickstart an economy struggling with a troubled property market and fresh lockdowns caused by COVID-19.
The consumer inflation slowdown came on the back of easing vegetable prices, said National Bureau of Statistics senior statistician Dong Lijuan, adding that the accelerated slaughter of live pigs helped pork costs to moderate.
According to the NBS, the cost of staple meat dropped 36.7 per cent on-year.
Meanwhile, producer prices were helped as "there were outright declines in the price of most upstream industrial goods such as coal and metals thanks to the fall in global commodity prices," Yue at Capital Economics added.
While worsening virus outbreaks could disrupt supply chains again, Yue said, and "with coal supply improving and property construction slowing, we see further downside to the price of industrial metals and energy".
While a narrowing gap between consumer inflation and factory gate costs reduces a squeeze on profit margins, HSBC senior economist Jing Liu added that "more easing is needed, as the consistently low core CPI points to growth pressure".