From Business Week.

Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 percent pricier than in 2009. Wu Sengyun, a 54-year-old retiree living in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are both up more than 20 percent. Willy Lin has cut back on serving free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetable prices climb. “The workers suffer,” he says. “Everybody is crying.”

Officially, China’s consumer price inflation topped out at 3.3 percent in July from the year before—a 21-month high. The government says the spike is a one-off caused by crop damage in recent flooding. Other costs, they say, such as cars, mobile-phone bills, and clothing, are actually falling, and price increases should slow as the economy cools. At an Aug. 12 press conference, Pan Jiancheng, a deputy director in the statistics bureau, announced that the inflationary threat was “overhyped.”

Many consumers, investors, analysts, and academics disagree. “There has been a jump in prices that isn’t reflected in the numbers,” says Chinese Academy of Social Sciences economist Yu Yongding, who formerly served as an adviser to China’s central bank. Michael Pettis, a finance professor at Peking University, wonders how a country that grew 10.3 percent last quarter and is seeing upward pressure on wages could register inflation of only a few percentage points. Another sign of rising prices: Multinationals in China expect to hike wages an average of 8.4 percent this year, according to human resources consultant Hewitt Associates (HEW). Ordinary Chinese, meanwhile don’t see the steep jumps in their housing, education, and medical expenses reflected in the official stats. “Inflation could well be 6 percent now for most people in China,” says Pettis.

If the doubters are right, then the government has a serious inflation problem that it either hasn’t figured out how to measure or has chosen to ignore. Other vital Chinese statistics—such as retail sales and unemployment—have also been murky. In the case of inflation, mismeasuring could prevent the kind of swift action needed to tame rising prices now—and force the government to apply much harsher measures later, such as a sharp increase in interest rates or a rapid appreciation of the currency to curb growth. The political risks are high, too: Social unrest in China often increases when ordinary workers can’t keep up with the cost of living.

Unlike most countries, China refuses to release in detail how much weighting it gives different product categories when calculating inflation, a situation that World Bank senior economist Louis Kuijs calls an “oddity.” An official with the statistics bureau says there has been no major change in the basket that makes up the price index since 2005. Plans call for adjusting the weighting next year to reflect housing costs more and food prices less, says the official, who declined to give her name because of agency rules.

Chinese consumers see firsthand how dramatically household expenses have changed in the last decade. Medical costs are the No. 1 concern for 84 percent of China’s rural residents, according to a recent survey by the Economist Intelligence Unit. Officially, medical prices are only up 2.8 percent so far this year. That number does not include the cost of gifts to hospital doctors and administrators to ensure adequate care. Also at issue: rising apartment and rental costs that eat up more of Chinese budgets. For 26-year-old Beijing resident Wang Yulu, the monthly rent of her 35-square-meter one-bedroom apartment has just increased more than 20 percent, to $338. “It’s too expensive,” says Wang, who works in the Beijing office of a Hong Kong advertising company. “I’m thinking of moving.”

Getting a handle on rising prices is a particular challenge in China. Hundreds of millions of rural Chinese keep moving to urban coastal areas, pushing up rents and food prices.