Financial markets had an unsettled session yesterday as economic data releases in China and the US rekindled doubts about the global recovery story.

Most worrying for investors was news of a surge in Chinese inflation, which some economists warned could prompt the country's authorities to slam on the policy brakes to keep the economy from overheating.

Consumer prices rose by 2.7 per cent in the year to February, the highest rate for 16 months, compared to a year-on-year rate of 1.5 per cent in January. Data on producer prices, factory output and retail sales were also robust.

Diana Choyleva, economist at Lombard Street Research, warned that inflation was set to accelerate further and that the People's Bank of China was behind the curve.

“China's massive monetary stimulus has caused the economy to overheat,” she said. “Given the force of the monetary expansion, it is highly likely that the PBoC will have to tighten too much because it left it too late.”

Indeed, Ashraf Laidi, chief market strategist at CMC Markets, noted speculation that a rise in Chinese interest rates could come as early as today.

“With 100 basis points of cumulative increase in banks' reserve requirements, this may be the time for the PBoC to pass the onus onto the borrowers,” he said.

But markets managed to shake off their initial concerns – with several analysts, not to mention Chinese officials, blaming the strength of the data on the New Year holiday.

Mark Williams at Capital Economics said the figures indicated that pressure for monetary tightening had actually eased since the beginning of the year if the timing of the festivities was taken into account.

Furthermore, he cautioned against overplaying the potential impact of interest rate rises and further big increases to the bank reserve requirement. “Neither will significantly slow growth in China, much less in the rest of the world,” he said.