Producer price index (PPI) slumped 3.3 percent in December from one year earlier, the sharpest fall in more than two years, and the decline deepened from November's 2.7 percent fall.

Tumbling oil and other commodity prices have extended the run of producer-price declines to a record 34 months.

PPI fell 1.9 percent year on year in 2014.

The easing inflationary pressure will give the central bank more room to initiate measures to support growth.

In November, the central bank cut benchmark interest rates for the first time since the summer of 2012. Analysts are divided over whether more rate cuts would follow in the coming months as the 2014's growth figures are likely to register its slowest pace in more than a decade.

Chang forecast two additional cuts in benchmark interest rates, by 25 basis points each time, in the first half of this year, as well as three cuts in the reserve requirement ratio (RRR), by 50 basis points each time, throughout the year.

Liu Liu, analyst of China International Capital Corp., expects the central bank to cut interest rates once and lower RRR four times this year likely in the first half.

However, Liu Ligang, chief Greater China economist at ANZ Banking Group., said the central bank appeared to be reluctant to cut RRR to counter falling prices and economic slowdown.

The Chinese government should use both structural reform measures and monetary policy tools to head off the risk of deflation, especially when domestic demand remains weak and commodity and energy prices continue to fall, Liu Ligang wrote in a report to clients.

Final figures for last year's gross domestic product (GDP) are slated for released on Jan 20.