(Bloomberg) -- China’s factory-gate deflation narrowed last month even as rising virus infections snarled factory operations, while a small uptick in consumer inflation will likely still leave the central bank room to ease policy and bolster the economy.

The producer price index fell 0.7% in December from a year earlier after declining 1.3% in the previous month, the National Bureau of Statistics said Thursday. Economists surveyed by Bloomberg had expected a 0.1% drop.

Consumer inflation gained 1.8% compared with a 1.6% increase in November, in line with economist expectations. Core inflation, which excludes volatile food and energy prices, picked up slightly to 0.7% after staying unchanged at 0.6% for three straight months.

Consumer prices “were generally stable” in December thanks to multiple measures to ensure market supply and price stability, said Dong Lijuan, chief statistician at the NBS.

The bigger-than-expected decline in PPI, meanwhile, reflects “the virus damage on industrial demand during the month,” said Zhou Hao, chief economist at Guotai Junan International Holdings.

There was little reaction in Chinese stocks to the data, with the CSI 300 Index trading up 0.2% at 10:38 a.m. in Shanghai. The yuan was 0.1% stronger against the greenback.

Surging infections following the abrupt reversal of Covid Zero pushed activity off a cliff as people became ill or stayed home for fear of catching the virus — contributing to what other economic indicators have suggested was the weakest month for China’s activity since early 2020. Factory production and new orders in December both contracted the most since April 2022, during Shanghai’s lockdown.

Major cities experiencing outbreaks did not begin to rebound until near the end of the month, high frequency data measuring subway usage and other mobility data showed.

What Bloomberg Economics Says ...

China’s factory-gate deflation is letting up — not as fast as we expected, but the trend is clear. A narrowing in PPI declines — the first up arrow in more than a year — showed upward pressure on factory-gate prices is emerging, likely driven by optimism the economy will rebound in 2023. 

— Eric Zhu, economist

Read the full report here.

As the reopening gains momentum both consumer and producer prices are likely to “warm up,” Zhou said — though he added that the “overall inflation pressure remains mild.”

Authorities on Thursday cited “volatile” international commodity prices this year as a concern. “Imported inflation pressure remains,” said Wan Jingsong, head of the National Development and Reform Commission’s price department, at a press briefing. He added though that China is “confident and capable” of maintaining stable prices.

Inflation in 2023 should “remain moderate and controllable, and the probability of a sustained and rapid rise in inflation is not high,” said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc. He added that monetary policy should be focused on stabilizing upward momentum for the economy’s recovery.

Officials have recently said monetary stimulus in 2023 will be at least as strong as last year, and policy will be focused on supporting domestic demand. In addition to interest-rate cuts, that could include another reduction in the reserve requirement ratio for banks — the amount of cash lenders have to keep in reserve.

While major cities are showing signs of recovery, economic pain may continue as Covid infections spread elsewhere in the country during a busier-than-usual Lunar New Year holiday travel rush.

Economists, though, expect a faster rebound once infections peak. The median estimate among economists surveyed by Bloomberg is for gross domestic product to expand 4.8% this year, accelerating from an estimated 3% in 2022.

--With assistance from Fran Wang.

(Updates throughout with additional context and commentary.)

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