Highlight jQuery UI autocomplete

The jQuery autocomplete source code is the culprit. If you look in the actual javascript files, you'll find this definition for displaying items in the autocomplete list:

_renderItem: function( ul, item) {
    return $( "<li></li>" )
        .data( "item.autocomplete", item )
        .append( $( "<a></a>" ).text( item.label ) )
        .appendTo( ul );
}

You'll see it's appending ".text(item.label)" which causes the html to be escaped. To solve this, you kind of have to put in a hack to override this "_renderItem" method, replacing the line that appends the label as plain text with a line that appends the label as html. So update your code like this:

$(function () {
    $("#autocompleteinputfield").autocomplete({
        // leave your code inside here exactly like it was
    })
    .data('autocomplete')._renderItem = function( ul, item ) {
        return $( "<li></li>" )
            .data( "item.autocomplete", item )
            .append( '<a>' + item.label + '</a>' )
            .appendTo( ul );
    };
});

Update: With version >=1.10 of jQuery, there are some small modifications:

$(function () {
    $("#autocompleteinputfield").autocomplete({
        // leave your code inside here exactly like it was
    })
    .data('ui-autocomplete')._renderItem = function( ul, item ) {
        return $( "<li></li>" )
            .data( "ui-autocomplete-item", item )
            .append( '<a>' + item.label + '</a>' )
            .appendTo( ul );
    };
});

$.extend($.ui.autocomplete.prototype, {
    _renderItem: function (ul, item) {
        var searchMask = this.element.val();
        var regEx = new RegExp(searchMask, "ig");
        var replaceMask = "<b style=\"color:green;\">$&</b>";
        var html = item.label.replace(regEx, replaceMask);

        return $("<li></li>")
            .data("item.autocomplete", item)
            .append($("<a></a>").html(html))
            .appendTo(ul);
    }
});