The rate of inflation is likely to accelerate on a year-on-year basis in 2011, and inflation could rise to double digits. This reflects loose credit conditions, higher prices for imported commodities, the negative impact of floods on local food supply and higher tariffs for electricity. Inflation is expected to average 6.4% in 2011-15, a level that the CBSL may view as tolerable. A number of factors on the supply side will help to restrain price rises; they include growth in local food production (which should bounce back to rapid expansion in 2012) and improvements to infrastructure. Nevertheless, several factors could cause the rate of inflation to exceed our forecasts. Entrenched public expectations of rapid price rises could lead to inflation-busting wage claims and allow companies to raise prices. Meanwhile, as GDP growth accelerates, supply-chain bottlenecks could emerge, while labour shortages will boost pay rises among skilled and semi-skilled workers. Perhaps the biggest risk, however, is that the government could revert to free-spending populist fiscal policies, stoking inflationary pressures.