The annual rate fell to 2.2 percent from 2.8 percent in December, largely reversing a surge that had fanned fears that inflation was spreading from China's buoyant stock and property markets to ordinary goods and services.
Economists polled by Reuters had expected a 2.5 percent rise, and the outcome would have been even lower but for a sharp rise in food prices - which were also the culprit for the jump in December's inflation rate from 1.9 percent in November.
"The moderation certainly is comforting after the sudden spike in December. Obviously the fluctuation was mainly driven by food prices. We think that it is a temporary phenomenon," said Yiping Huang, chief China economist with Citigroup in Hong Kong.
Food prices, which make up a third of the index basket, rose 5.0 percent in January from a year earlier, with food oil, eggs and meat and poultry all logging double-digit increases. Grain prices, a key determinant of inflation, were up 6.9 percent. Last summer they were rising at a 2-3 percent clip.
Stripping out food, the CPI rose just 0.7 percent. Yi Gang, assistant governor of the People's Bank of China (PBOC), expressed confidence on Tuesday that the rise in grain prices would be temporary and reaffirmed the central bank's target for year-average inflation in 2007 of less than 3 percent.
Consumer prices on average rose 1.5 percent in 2006. The dip in inflation means that bank deposit rates are no longer negative in real terms, easing pressure on the central bank to increase interest rates to deter savers from pulling their money out of the bank, perhaps to speculate on stocks.
Savers earn 2.52 percent on one-year bank deposits. The World Bank said in a report on Wednesday that while a surge in inflation was unlikely in 2007, the recent uptick in price rises supported arguments for more rapid currency gains.
Separately, the Commerce Ministry said on Wednesday that China had drawn in $5.18 billion in foreign direct investment in January, up 13.9 percent from a year earlier.