According to the People's Bank of China, the official inflation rate in China this year is expected to be 4.5%. I don't believe that for a second. China is growing like crazy -- it's a runaway train that I don't think the central government can (or perhaps is willing) to stop. My clients this year have all projected over 30% growth, and the number of households with more than $250k is expected to expand by more than 20% each year for the next 5 years. I doubt the central government wants to slam on the brakes because everybody feels richer and sees more opportunities, which in turn keep the lid on political unrest. The cost of this is high inflation. The prices of food items like corn and pork hit highs earlier this year, supposedly driven by an outbreak of blue ear disease (for the pork) and demand for biofuels (for the corn). I don't think the government wants to admit that the growth is driving demand and thus prices as people consume more all around.
Especially when it comes to China, I believe in anecdotal data. You can't trust what the government says, so for instance, if you want to know the true exchange rate, you can go to the black market dealers (who are offering 7.3 RMB to the dollar) or use the Economist Big Mac Index (which says the exchange rate should be closer to 3.2 RMB to the dollar).
My own experience also shows inflation is running rampant:
(1) Last week, I went to a food stall to buy fried soup dumplings. I've been there numerous times before after discovering the place during my first week in Shanghai. In January, I paid 2 RMB for 4. In October, when I brought my friends there, the price had been raised to 2.5 RMB. When I took Katie there last week, it had been raised again to 3 RMB. Annualized, that inflation rate is higher than 60%.
(2) My rent is currently 7200/month. The signs I see posted outside my building show the same unit layout is now listed at 9000/month. Sure, there may be some room for negotiation, but even cutting 10% off that rent would mean an 800 RMB/month increase - implying a 12.5% inflation rate.
(3) Gas prices were just raised 10% (by the central government no less). Since when do >10% increases in energy, food, and housing lead to a overall inflation rate of below 5%? There may be some poor farmers in the middle of Anhui not seeing an increase in their costs of living, but I doubt they are somehow getting specially-priced gas or pork in their towns as well.
In other news, the Shanghai stock index is still above 6000, despite a recent selloff. That's 50% higher than when I first moved to Shanghai and spoke about the bubble. The price/earnings ratio is also hitting highs of 39:1. The S&P 500 by contrast is at 16.