High GDP growth and inflation frequently go together. Since the launch of the reform program, there have been four serious bouts of inflation in China. The last occurred in the early 1990s, peaking at 27 per cent in late 1994. Thereafter, inflation began easing and in 1998 turned into a deflation that continued until 2000. The lowest rate of deflation was in 1999, at 2.2 per cent. The second episode of deflation occurred in the last quarter of 2001 and continued until the end of 2002 (Feyzioglu, 2004). The annual deflationary rate during 2002 was 0.8 per cent. The next year prices recorded a small increase of 1.2 per cent, increasing to 3.9 per cent in 2004.