Keeping inflation under control is now the government's main policy challenge. Year-on-year consumer price inflation hit 4.9% in January and is expected to average 5% in 2011. Strong liquidity growth and booming demand have contributed to the acceleration in price increases, but rising input costs are the main threat in 2011-15. The large pay rises that firms are having to offer in order to keep workers may put upward pressure on consumer prices, as well as raising manufacturing costs; this mechanism has a particularly strong impact on prices for labour-intensive agricultural products. Rising global commodity price pressures are a further concern.

The risks to the Economist Intelligence Unit's inflation forecast remain largely on the upside. The main danger concerns the volatility of food prices, which account for a large share of the consumer price index basket in China. Local agricultural prices are vulnerable to the vagaries of the weather, particularly in China, but also internationally. Food prices are in any case on a long-term upward trend as agricultural land becomes scarcer and the cost of other farming inputs increases.

Producer prices will be subject to strong upward forces in 2011-15 as a result of booming domestic demand and policy-driven increases in state-mandated prices for fuel and utilities. Producer price inflation should nevertheless cool from 2012 onwards as the rising global supply of raw materials and food reins in international commodity prices. There is a danger that speculative asset-price bubbles, notably in property or equity markets, could emerge in the forecast period. The risk is aggravated by negative real deposit interest rates, which encourage savers to put their money into other saving and investment vehicles.