Wang also believes that with the expanding population, the shortage of grain and heightened level of consumption will inevitably pull up the overall price level. Grain price hikes and the readjustment of public utility prices will be the major factors pulling up the price index in 2007.

"The CPI will grow 3 percent or even higher this year," Wang said.

According to the analysis and predictions of price trends in 2007, made by the Center for Forecasting Science of the Chinese Academy of Sciences, the continuous increase of food prices means that production and sales of grain in China are not balanced. The short supply of grain in the global market further intensifies the tight supply of grain at home.

Is there inflation?

"Prevention of inflation may become the major task," Wang said.

People who are familiar with the Chinese economy know that after reform and market opening, there were three serious inflation periods: 1985, 1988-89 and 1993-95. They were all triggered by price hikes in grain and oil. That's in part because the increases in grain and oil prices are passed through the whole industrial chain, especially the downstream industries, such as food processing and the biochemical industry.

The present price rise of grain and oil is high compared even with that in the run-up to the 1993-95 inflationary period. Further, before that period, prices of natural gas, water, electricity, coal and urban construction land were raised many times-just as is happening now.

However, what troubles Wang is that China's CPI looks comparatively low, which is contradictory to people's feelings that prices are rising. This might conceal risks of inflation.

Another person who embraces the same view is Yu Yongding, former member of the Monetary Policy Committee of the PBC, who holds that controlling inflation should be one of the major tasks in 2007.

"China must deal with the inflation rate prudently, never allowing it to surpass 4-5 percent," Yu said.

In Yu's opinion, China should draw up a target for inflation, making the public feel secure that the government is taking necessary actions to reduce the inflation rate.

In fact, the PBC warned that there might be inflation in China's economy as early as the second quarter of 2006. In its monetary policy reports of the second, third and fourth quarters, there are also warnings of inflation. The central bank's judgment of future price trends is not optimistic.

At an annual conference held in December 2006, Zhou Xiaochuan, Governor of the PBC, clearly expressed his views on inflation, "Many people think that there is no need to worry about the present inflation level, but I don't think so. Inflation may speed up at any time, so we should pay great attention to this issue."

At the working conference of the PBC held in Beijing in January, the monetary policy of 2007 was advanced. Different from the previous years, the new monetary policy does not include clear goals regarding the narrow money supply (M1) and the total volume of credit, but makes clear that the broad money supply (M2) may grow 16 percent.

According to the central bank, the 16-percent target for M2 growth mainly comes from the prediction that China's GDP will increase about 8 percent and the CPI growth will not exceed 3 percent.

But clearly amid the circumstances of overflowing liquidity and increasing CPI, the central bank's monetary policy has transformed from focusing on growth to addressing inflation.

Still, the opinions of the central bank are different from those of the NDRC. Wang Xiaoguang, a researcher at the Institute of Economics of the NDRC, believes that the risk of major inflation in 2007 is not large.

In Wang's opinion, the Chinese economy will continue to have "high growth, low inflation and good returns" in 2007. "Compared with 2006, inflation pressure may be more notable and the inflation rate will increase a little bit. But we predict that the CPI will rise around 2 percent for the whole year, still at a low level."