Cutting China's 2012 economic growth target to 7.5 percent at the start of the annual meeting of parliament last week says clearly that too rapid an expansion makes inflation too tough to contain, given the reforms needed to create widespread wealth.

That he did so in the week it was revealed that the annual rate of inflation in February receded to a 20-month low of 3.2 percent, barely seven months after being twice that at a three-year peak of 6.5 percent, speaks volumes about the gravity of price risks.

"The fact that we're talking about the question recognizes the fact that it's not a slam-dunk that the inflation beast has been tamed," said Jeremy Stevens, China economist at Standard Bank in Beijing.

"The average January-February inflation rate is 3.9 percent and only a fraction below the government's target for the full year," Stevens told Reuters. "Most people believe that in the second half of the year the inflation rate picks up again."

The growth and inflation trade-off is particularly pointed for Wen and the Communist Party leadership which justifies its one-party grip on power with the promise of stability and prosperity for the country's 1.3 billion people, of whom most are poor and an estimated 10 percent live on less than $1 per day.

The country's economic ascent has increasingly concentrated riches in the hands of an urban elite in the last decade, during which China has become the world's second biggest economy and accumulated $3.2 trillion of official reserves -- the largest store of foreign wealth on the planet.

Wen needs wages for the country's 800 million mainly low paid workers to rise quickly enough to help bridge the chasm between rich and poor, while pursuing painful structural reforms to increase domestic demand and cut dependence on volatile exports and foreign capital inflows.

And, because inflation is the surest way to ignite the social unrest that most worries the Party -- given that the poor spend almost every penny of their income on basic essentials -- he must do it while keeping a lid on costs.

The consensus in the latest Reuters poll is that inflation will be within the government's 4 percent forecast for the year.

But with a dip down to 3.1 percent by Q3, the implication is for a rebound in the last quarter, a worry for policymakers as most of the anticipated fall in the rate of inflation in the first half will come from the base effects of last year's surge.

Societe Generale economists calculate that fully 1.2 percentage points of the 1.3 point fall in the January to February inflation rate came from base effects.

HSBC, the bank which confidently declared that the "inflation story is over" in a note to clients after data on Friday showed February year on year consumer price inflation at 3.2 percent, seems to be hedging its bets.

Its China economics team expects at least 100 basis points of cuts in reserve ratio requirements (RRR) from the People's Bank of China (PBOC) for the rest of 2012 after cuts of 50 bps last month and in November 2011.

That compares with the market consensus of 150 bps more and arch-rival Standard Chartered's 200 bps call to keep the economy gliding as growth slows.

"The point is to make sure there are smooth liquidity conditions that are supportive to growth, but not necessarily a very aggressive easing that would invite future inflation risks," HSBC China economist, Sun Junwei, told Reuters.

In other words, a decision to ease monetary policy is not necessarily about having snuffed out inflation risks at all.

INFLATION CONSTRAINTS

Indeed, those risks start to loom larger barely six months from now, and grow even more intense when inflation is viewed as an expression of economic constraint -- too little supply relative to demand -- rather than expansion.

China has a shrinking labor force, mandated double digit wage hikes, an export sector losing its competitive cost advantage and an insatiable thirst for raw material imports.

"With China's working-age population set to decline steadily from 2012 onward due to retirement, the notion that a minimum of 8 percent GDP growth is necessary to sustain full employment and preserve social stability is now outdated," analysts at Nomura said in a note to clients.

It also means that inflation pressure will build at a much lower rate of growth going forward, a fact unlikely to be lost on China's leadership, which has seen periods of high inflation often coincide with protests and social unrest.

The government is already raising the energy prices it controls, using the leeway of slackening demand created by the economic slowdown it partly engineered, and analysts expect further reforms in electricity, natural gas, water and more.

Such reforms inevitably lift prices, increasing the urgency of planned social security, health and tax reforms to boost disposable income in households that in 2011 was just 6,977 yuan ($1,107) in rural areas and 21,810 yuan in urban areas.

FOOD PRICE RISKS

Meanwhile, the risk of a spike in food prices persists.

A Reuters investigation based on assessments by key trading houses, cooperatives, and an influential consultancy suggests that Beijing has overstated the corn crop by the equivalent of between 12 days and 44 days of consumption, a gap big enough to drive up global grain prices if the authorities act to close it.

That would in turn raise the price of Chinese pork -- the country's most popular meat is a key determinant of inflationary expectations -- which is already 86 percent higher than U.S. hog prices, according to Colorado consultancy Global Agritrends.

Analysts at UBS reckon China's overall consumption growth will be 9.3 percent in 2012, firmly ahead of the bank's forecast for GDP growth at 8.5 percent, meaning the whiff of inflation will be pretty strong in a $7.5 trillion economy that is bustling along quite speedily.

"I think you need to look carefully at the fact that the PBOC has specifically trodden cautiously in this cycle," said Standard Bank's Stevens, pointing out that the relative tightness of policy settings now is a consequence of having eased too aggressively after the 2008/09 financial crisis.

"This time around there does seem to be a genuine desire to be gradualist in the approach in how to deal with supporting economic activity."

(Reporting by Nick Edwards; Editing by Daniel Magnowski)

• A Permanent Economic Emergency