Adviser: Inflation to hit 5%

"The recent rise in inflation is quite different from the type of inflation China has suffered previously. The main cause of (today's) inflation is cost increases, that is, rising commodity prices - the cost of imported raw materials - and accelerating wage growth, which rose by between 17 and 20 percent in 2010," said Li, an economist at Tsinghua University.

Li Daokui, member of the central bank's monetary policy committee

He said that the surge in commodities prices will have a negative impact, as it will be a de facto tax on all consumers and producers. However, the rising labor cost will be beneficial for the economy, especially for people on low incomes.

Inflation will be under control this year, because overall demand in the Chinese market lags behind supply, said Li.

"We still have ample production capacity. If agricultural production is reasonably healthy, and international commodity prices don't rise too high, it's likely we can keep inflation below 5 percent," he said. "Core inflation, excluding food and fuel, will be kept well below 3 percent."

China's Consumer Price Index, a main gauge of inflation, rose to a 28-month high of 5.1 percent in November, before slowing to 4.6 in December and then picking up again to 4.9 percent in January. Some analysts predicted that the figure would rise as high as 6 percent in the first half of the year.

Li said recent droughts in some major agricultural regions and unrest in the Middle East would affect domestic inflation control, and the latter would especially be a concern.

"As the turmoil in North Africa and the Middle East leads to higher and higher crude oil prices, certainly it's a major concern for China's economy, because the country has recently imported as much as 55 percent of its oil consumption."

"An oil price of $120 or $130 a barrel might be the worst scenario for 2011." Li said, adding that the government and businesses are working to formulate plans to hedge against further increases in international commodity prices.