[Yangtze Macro Yu Bo Team · In-Depth] Oil prices rise, where will inflation head? — Price Guide Series 1

(Source: Yu Bo Macro Notes)

Authors: Song Xiaoxiao, Yu Bo

The US-Iran conflict has led to the blockade of the Strait of Hormuz, driving up oil prices and raising global inflation expectations, putting pressure on importing countries like China from imported inflation. Oil prices are highly correlated with the PPI, with related industry chains accounting for about 12% of the PPI weight. Quantitative analysis shows that a 10% increase in oil prices could raise the PPI year-on-year by about 0.4-0.7 percentage points, with effects lasting 2-4 months and upstream transmission being the fastest. The impact of oil prices on CPI is weaker and lags by 4-6 months, and in the context of weak domestic demand and overcapacity, the transmission from PPI to CPI is not smooth. The evolution of the conflict and the demand for restocking will determine the trend of oil prices. It is expected that the year-on-year PPI may turn positive in March, with a possible peak exceeding 4% within the year; the year-on-year CPI is expected to rise moderately, with a peak likely close to 2%. Referring to the early stages of the Russia-Ukraine conflict, major asset classes may exhibit “safe-haven + stagflation” trading characteristics.

Abstract

The US-Iran conflict is a black swan event, with rising crude oil prices lifting inflation expectations.

The US-Iran conflict has led to the blockade of the Strait of Hormuz, with some energy facilities in the Middle East damaged, shipping halted, and oil prices soaring. This strait accounts for approximately 25% of global oil transport, and Middle Eastern crude oil exports account for over 30% of the total, primarily flowing to countries like China, Japan, and India, creating significant supply shocks. Over 70% of China’s crude oil is imported, and Japan, South Korea, India, and Europe also rely heavily on this route, making prolonged blockades likely to bring significant imported inflation pressure globally. Although the US faces no supply concerns, rising oil prices may also push up its inflation, putting it in a dilemma between “protecting navigation” and “avoiding escalation.” The conflict has triggered global energy supply shocks, with many countries responding by releasing reserves and diversifying supply. Even if the conflict ends, the demand for restocking and energy security may continue to support elevated oil prices in the short term.

Oil and PPI: Highly consistent trends, broadly impacting upstream and downstream

The year-on-year trends of oil prices and PPI are highly consistent. Oil and gas extraction, petroleum refining, chemicals, synthetic fibers, and rubber and plastics are directly related industries, along with the electricity and gas industries affected by transportation costs and substitution effects, collectively accounting for about 12% of PPI weight. Through multiple quantitative analysis dimensions such as contribution rates, correlations, lags, and input-output tables, we comprehensively assess the impact of oil prices on PPI:

1. Over the past 11 years, the contribution of the crude oil industry chain to the year-on-year PPI has almost always ranked among the top three.

2. The impact of oil prices on year-on-year PPI will last for 2-4 months, with upstream industries transmitting the fastest, while mid- and downstream industries have certain time lags.

3. Calculations based on input-output tables indicate that the impact coefficient of oil prices on PPI is rising, with a 10% increase in oil prices stimulating PPI year-on-year by about 0.4pct-0.7pct.

Oil and CPI: Basic consistency, but transmission lags exist

The year-on-year trends of oil prices and CPI are not completely consistent, with a weaker correlation than with PPI. During certain periods (such as the pork supply shock), CPI may exhibit independent trends. Quantitative analysis shows that the overall correlation coefficient between year-on-year oil prices and CPI is relatively low, with a lag effect of about 4-6 months. The impact on CPI components mainly manifests in transportation and communication, housing, food and tobacco, and education, culture, and entertainment, with more direct and rapid effects on the first two categories and generally lagging effects on the latter two. Under the price guidance mechanism of the National Development and Reform Commission, temporary adjustments can mitigate the impact of abnormal fluctuations in international oil prices, thus ensuring relative stability in the domestic price system.

PPI and CPI: Poor transmission, limited oil pull on CPI

Since 2012, the correlation among PPI, CPI, and corporate profits has significantly weakened, especially during moments of imported inflation shocks. Before 2012, strong domestic demand allowed international commodity price increases to smoothly transmit to PPI, pushing CPI up in sync, with corporate profits closely aligned with price indicators. After 2012, under imported inflation shocks, international commodity price increases still significantly drove PPI, but the transmission efficiency to CPI drastically decreased, weakening the correlation between overall industrial profits and price indicators. Between 1996 and 2012, the correlation coefficient between CPI and PPI reached 0.72, dropping to 0.48 since 2023.

There are three main reasons: First, CPI trends are more dominated by food and service items, making them less directly influenced by international commodities; second, weak terminal consumer demand makes it difficult for enterprises to pass on costs through price increases; third, overcapacity suppresses price increases.

Domestic inflation outlook: Year-on-year PPI peak may approach 4%

Due to rising oil prices, we have revised upward our domestic inflation expectations for 2026. The main influencing factors in the future are: 1) The potential demand for crude oil restocking from various countries after the conflict ends, combined with the heightened importance of energy security under global uncertainties, making it difficult for oil prices to return to low levels of around $60/barrel in the short term. 2) We outline three potential scenarios for the US-Iran conflict: First, in an optimistic scenario, the conflict quickly calms, with oil prices peaking and then dropping to $75/barrel by year-end; second, in a neutral scenario, the conflict continues but does not escalate significantly, raising the oil price center to $100/barrel, gradually dropping to $85/barrel by year-end; third, in a pessimistic scenario, the situation deteriorates, pushing the oil price center to $110/barrel, with a gradual decrease to $90/barrel by year-end. Based on comprehensive judgment, the year-on-year PPI may turn positive as early as March, with a possible peak exceeding 4% within the year; the year-on-year CPI is expected to rise moderately, with a peak likely close to 2%.

Referring to the Russia-Ukraine conflict, we analyze the trend of major asset classes.

Both the Russia-Ukraine conflict and the US-Iran conflict have impacted the global energy market and raised oil prices, but there are differences in the intensity of war, the degree of supply shocks, and their persistence, as well as differences in domestic economic policy cycles and market expectations. However, the supply shocks and market sentiment impacts from the early stages of the conflict may exhibit some similarities. In the early stages of the Russia-Ukraine conflict, major asset classes showed “safe-haven + stagflation” trading characteristics: crude oil quickly rose and then fluctuated at high levels; gold briefly rose due to short-term safe-haven sentiments but faced pressure from rising interest rate expectations; the RMB faced depreciation pressure; in A-shares, the growth sector underperformed while dividend assets remained relatively stable; A-bonds were primarily influenced by monetary policy, with good absorption of inflation expectations and no significant trend changes.

1. The US-Iran conflict is a black swan event, with rising crude oil prices lifting inflation expectations.

2. Oil and PPI: Highly consistent trends, broadly impacting upstream and downstream.

3. Oil and CPI: Not completely consistent, with transmission lags.

4. PPI and CPI: Poor transmission, limited oil pull on CPI.

5. Domestic inflation outlook: Year-on-year PPI peak may approach 4%.

6. Referring to the Russia-Ukraine conflict, we analyze the trend of major asset classes.

The US-Iran conflict is a black swan event, with rising crude oil prices lifting inflation expectations.

Crude oil is the mother of industry, with a long upstream, midstream, and downstream industry chain, spanning exploration, processing, and demand. The upstream exploration segment focuses on oil and gas extraction and the comprehensive utilization of waste resources; the midstream processing segment mainly consists of oil, coal, and other fuel processing industries, which work together with upstream exploration to crack crude oil into light and heavy oils, further deriving products like refined oil, synthetic resins, synthetic rubber, synthetic fibers, as well as basic chemical products like coke, paraffin, and asphalt; the downstream demand side widely covers transportation fuels, electricity, agriculture, home appliances, tires, textiles, building materials, etc., ultimately transmitting to terminal consumption scenarios such as water and electricity fuels, household appliances, transportation tools, and clothing. Oil prices are influenced by both supply and demand sides, with the supply side primarily impacted by geopolitical factors, shale oil supply, and OPEC policies, while the demand side is affected by macroeconomics, inventory, and alternative energy sources.

At the end of February, the US-Iran conflict broke out, leading to the blockade of the Strait of Hormuz, with energy infrastructure like natural gas and crude oil also affected. At the end of February, the US and Israel launched military strikes against Iran, resulting in the death of Iranian Supreme Leader Khamenei during the airstrike. Iran subsequently retaliated with missile strikes against Israel and US military bases in the Middle East, and blocked the Strait of Hormuz, causing shipping to come to a halt. As the conflict escalates, it spreads to multiple Gulf countries, with both sides targeting energy facilities such as natural gas and crude oil, leading to soaring international oil prices and turmoil in the global energy market.

The blockade of the global energy choke point, the Strait of Hormuz, has affected some oil refineries in the Middle East, potentially impacting oil supply and demand for some time.

1. On the supply side, the Strait of Hormuz accounts for about 25% of global oil transport, and the daily output and exports of crude oil from the Middle East account for over 30%, which has impacted global crude oil supply. The crude oil exports from the Middle East primarily flow to the Asia-Pacific region, including China, Japan, India, and Singapore.

2. On the demand side, most countries are highly dependent on crude oil imports, with some countries not having sufficient crude oil reserves, which could have a significant impact. Industrial production is heavily reliant on crude oil, and as an industrial power, China is also the largest crude oil importer in the world, with over 70% of its crude oil dependent on imports. Furthermore, East Asian countries such as Japan, South Korea, and India, as well as some European countries, also heavily rely on the Strait of Hormuz for crude oil imports. If the blockade continues, the pressure of imported inflation cannot be underestimated. For the US, although there is no supply pressure, soaring oil prices will also put domestic inflation under pressure. At the same time, the US is faced with a dilemma between supporting Israel and security commitments to Gulf allies, caught between “protecting navigation” and “avoiding escalation.”

The blockade of the Strait of Hormuz has evolved into a global energy supply crisis, and the potential restocking demand after the US-Iran conflict ends could lead to oil prices remaining elevated in the short term. Recently, major oil-consuming countries have adopted measures such as releasing strategic reserves, diversifying supply channels, and adjusting energy structures to ensure their energy security and economic stability. After the conflict ends, the demand for restocking and strengthening energy security is expected to remain strong for strategic energy sources such as crude oil, which may further keep oil prices elevated in the short term.

Oil and PPI: Highly consistent trends, broadly impacting upstream and downstream.

It is easy to see that the year-on-year trends of oil prices and PPI are highly consistent. From historical data, the year-on-year trends of oil prices and PPI are closely aligned, mainly because oil prices, as an important upstream raw material price, directly impact the factory prices of industrial products through industry chain cost transmission mechanisms.

Specifically, the oil and gas extraction, petroleum refining, chemical raw materials and products, chemical fibers, and rubber and plastics industries are directly related to oil. Additionally, the rise in oil prices will push up coal transportation costs and indirectly raise electricity generation costs. There is also a substitution effect; when oil prices are high, some industrial users turn to electricity instead of fuel oil, which will increase electricity demand. The aforementioned six industries account for about 12% of PPI weight, and the price trends in the crude oil industry chain are highly consistent with PPI year-on-year, which explains most of the fluctuations in PPI year-on-year.

Through regression fitting and calculations, we find that a 10% increase in oil prices can raise PPI year-on-year by about 0.4%. However, in addition to calculations, we further comprehensively assess the impact of oil prices on PPI through various dimensions, including contribution rates, correlations, lags, and input-output tables.

1. First, we split the contribution rates of PPI year-on-year by industry over the past 11 years, finding that the crude oil industry chain has almost always ranked among the top three. We divide PPI into multiple industry chains, including crude oil, coal, nonferrous metals, ferrous metals, utilities, new three types, traditional manufacturing, etc. Among them, commodities almost dominate the top three contributions to PPI year-on-year each year, with the contribution of the crude oil industry chain also consistently ranking among the top three over the past 11 years.

2. Second, we calculate the correlation and lags of oil prices with PPI by industry. Whether from 2015 to the present or from 2022 to the present (referring to the impact of Russia-Ukraine), the impact of oil prices on PPI year-on-year may last for 2-4 months (with a correlation coefficient above 0.8), with upstream oil and gas extraction and coal processing showing the strongest correlation, the fastest transmission, and immediate response; the midstream chemical industry, metal products, and downstream textiles also have strong correlations; however, the midstream electrical machinery, general equipment, specialized equipment, and downstream paper printing, computer communications, etc., show slightly weaker correlations and require time for transmission.

3. Finally, the degree of impact of oil prices on PPI calculated by input-output tables is increasing, with the latest results indicating that a 10% increase in oil prices will affect PPI year-on-year by 0.7pct. Based on the input-output tables from 2020 and 2023 and the weights of various industries in PPI, we find that the impact coefficient of oil prices on PPI year-on-year is on the rise. For every unit increase in oil prices (100%), it raises PPI year-on-year by 4.55pct, increasing to 7.22pct. This is due to two reasons: one is that the weight of the crude oil industry chain is increasing, and the other is that with the rise in production efficiency, the proportion of other intermediate inputs is decreasing, thus increasing the complete consumption coefficient of crude oil.

Oil and CPI: Not completely consistent, and transmission lags exist

The year-on-year trends of oil prices and CPI have a certain correlation, but it is weaker than that with PPI, and the trends are not completely consistent. During some phases of pork supply shocks, CPI year-on-year may show independent trends. From historical data, the year-on-year trends of oil prices and CPI have a certain correlation, mainly because oil prices, as a fundamental energy price spanning production, circulation, and consumption stages, push up the costs of food and tobacco (accounting for nearly 30%) through channels such as agricultural production, food processing, and logistics transportation, and also raise the price levels of transportation and communication components (accounting for about 14%) through energy-related consumer goods, thus increasing the overall CPI.

China’s refined oil prices are highly consistent with international crude oil price trends, but price guidance mechanisms to some extent reduce the shock from oil prices, ensuring stability in the domestic price consumption system. Fluctuations in international crude oil prices directly transmit to domestic gasoline and diesel prices. The price management measures set by the National Development and Reform Commission ensure a smooth transmission of international oil price fluctuations to the domestic market while mitigating the impact of abnormal fluctuations in international oil prices. For example, on March 23, the National Development and Reform Commission implemented temporary control measures to address the significant rise in international oil prices caused by the US-Iran conflict. Domestic gasoline and diesel prices (standardized) should be raised by 2205 yuan and 2120 yuan per ton, respectively, but were actually adjusted down by 1160 yuan and 1115 yuan after control.

We also calculate the correlation coefficients of year-on-year oil prices with each component of CPI to assess correlation and lags. First, the correlation coefficient between year-on-year oil prices and CPI is relatively low, and often exhibits lagging characteristics, gradually strengthening around 4-6 months. The impact of oil prices on CPI components is mainly reflected in transportation and communication, housing, food and tobacco, and education and entertainment. The impact on the former two is greater and more rapid, while the impact on the latter two generally lags.

PPI and CPI: Poor transmission, limited oil pull on CPI

Since 2012, the correlation among PPI, CPI, and corporate profits has noticeably weakened, especially during periods of imported inflation shocks.

1. Before 2012, at that time, China’s economy was in a phase of rapid growth led by heavy and chemical industries, with strong demand. Rising international commodity prices quickly transmitted to PPI through the industry chain, while strong terminal consumer demand allowed enterprises to smoothly pass on cost pressures to downstream consumers, driving CPI to rise in sync. Under this transmission chain, corporate profits and price indicators exhibited high synchronicity, with PPI increases often accompanying the expansion of industrial profits.

2. After 2012, as China’s economy entered a new normal and structural transformation deepened, the linkage among the three underwent fundamental changes. During periods of imported inflation shocks, while international oil prices and other commodities still significantly drove PPI, the transmission efficiency to CPI drastically decreased. Consequently, reflecting on corporate profits, during periods of imported inflation, the upstream extraction and raw material industries benefited from PPI increases, but mid- and downstream manufacturing faced profit pressures due to rising costs, exacerbating profit differentiation among industries, which in turn weakened the correlation between overall industrial profits and price indicators.

Quantitative indicators show that the correlation between PPI and CPI has significantly weakened. Historical data reveals that between 1996 and 2012, CPI and PPI were highly correlated, with a correlation coefficient of 0.72; between 2012 and 2022, the correlation coefficient turned negative; since 2023, the correlation coefficient has partially recovered but has dropped to 0.48, reflecting the gradual weakening of the price transmission mechanism.

The decline in the correlation between PPI and CPI, or the decrease in the efficiency of PPI transmitting to CPI, can be attributed to three main reasons:

1. The weight of food and services in CPI is high, and often fluctuations in food items dominate CPI trends, limiting the direct influence of international commodities.

2. Weak terminal consumer demand makes it difficult for mid- and downstream enterprises to pass on costs through price increases. Influenced by factors such as weak current income perceptions and insufficient confidence in future income, consumer behavior has become cautious, with over 60% of residents inclined to increase savings and high savings willingness persisting, resulting in insufficient endogenous consumption power, making it difficult for weak terminal demand to effectively pull prices.

3. Overcapacity has suppressed the space for price increases, with industrial capacity utilization remaining low, and some industries facing “involution” competitive pressures, putting pressure on corporate pricing power.

In this context, although geopolitical conflicts and other factors push up imported inflation, the dual constraints of pressures on the production side and weak consumer demand may still hinder the transmission of PPI to CPI.

Domestic inflation outlook: Year-on-year PPI peak may approach 4%

Initially, the market expected domestic inflation to rise moderately in 2026, but after the rise in oil prices, we have adjusted our CPI year-on-year and PPI year-on-year expectations upward. The key considerations include:

1. The potential demand for crude oil restocking from various countries after the conflict ends. Although different countries have varying scales of crude oil reserves, the war and conflict have lasted over 20 days, consuming portions of their reserves. After the conflict ends, there may be restocking demands, a phenomenon also observed during the Russia-Ukraine conflict. Moreover, the geopolitical conflicts this year have also provided warnings to various countries, highlighting the importance of “safety” in the context of global uncertainties and deepening contradictions, leading to greater attention to reserves in critical areas such as energy. Therefore, oil prices may find it challenging to return to levels around $60/barrel by the end of 2025.

2. The most critical factor remains the unfolding direction of the US-Iran conflict. We propose three scenario hypotheses:

First, in an optimistic scenario, the conflict quickly calms, with the strait temporarily blocked and then reopening, leading to orderly releases of oil demand due to global restocking. We expect Brent oil prices to peak in the short term and then drop, averaging $90/barrel in April before gradually declining to $75/barrel by year-end.

Second, in a neutral scenario, the duration of the conflict exceeds expectations but does not escalate significantly, resulting in substantial supply gaps in global crude oil. OPEC+ may find it difficult to fully offset these gaps, raising the oil price center to $100/barrel, remaining elevated and fluctuating during the conflict, gradually easing to $85/barrel by year-end.

Third, in a pessimistic scenario, the situation deteriorates sharply, with the conflict escalating further and lasting longer, with major oil-producing countries passively involved, leading to high geopolitical risk premiums that push oil prices to spikes around $110/barrel, with high fluctuations continuing into Q3 and gradually retreating to $90/barrel by year-end.

Considering the above factors and the analysis in Chapters 2-4 of the report, we have revised our forecasts for year-on-year CPI and PPI upward. The year-on-year PPI may turn positive as early as March, and subsequently rise due to the lagging effects of oil prices, continued impacts, and low base effects, with a possible peak exceeding 4% within the year; the year-on-year CPI is expected to rise moderately, with a peak likely close to 2%.

Referring to the Russia-Ukraine conflict, we analyze the trend of major asset classes.

Both the Russia-Ukraine conflict and the US-Iran conflict have had significant impacts on the global energy market. Both conflicts led to rising oil prices and PPI in the early stages, but there are differences in the intensity of warfare, the impact on crude oil supply, and the price transmission effects.

First, the intensity of warfare. The Russia-Ukraine conflict is a long-term consumption war lasting over two years, involving conventional warfare, infrastructure destruction, and energy sanctions, with higher intensity and longer front lines; the US-Iran conflict currently shows high-intensity short-term military confrontation and strait blockade, which is fierce but has not yet escalated into a full-scale war.

Second, the impact on crude oil supply. The Russia-Ukraine conflict has obstructed Russian crude oil exports, leading to ongoing effects; the US-Iran conflict primarily causes shipping disruptions due to the blockade of the Strait of Hormuz, threatening about one-fifth of global oil transport, but has limited direct damage to oil field extraction.

Third, the impact on oil prices and PPI. The Russia-Ukraine conflict has kept oil prices above $100/barrel for an extended period, with PPI year-on-year once exceeding 10%; the US-Iran conflict currently leads to short-term spikes in oil prices, but the persistence of the conflict and its effects on oil prices and PPI remain in doubt.

Although there are many differences between the Russia-Ukraine conflict and the US-Iran conflict, the current domestic economic policy cycle and market expectations are also different. However, the supply shocks and impacts on asset markets caused by the early stages of the conflict may exhibit some similarities. Therefore, we summarize and analyze the performance of various major asset classes during the early stages of the Russia-Ukraine conflict. We observe that major asset classes displayed clear “safe-haven + stagflation” trading characteristics during the Russia-Ukraine conflict, specifically as follows:

1. Crude oil: Prices surged rapidly after the outbreak of the conflict, followed by high fluctuations for nearly two quarters.

2. Gold: Short-term safe-haven sentiment pushed gold prices slightly higher, but the duration was very short, subsequently facing pressure from rising inflation expectations and intensified interest rate hike expectations.

3. RMB: The RMB faced depreciation pressure under the dollar interest rate hike cycle.

4. A-shares: The market notably exhibited safe-haven characteristics, with technology growth sectors leading declines, while high cash flow and dividend assets remained relatively stable.

5. A-bonds: The domestic bond market was limitedly impacted by the conflict; inflation expectations were well absorbed, primarily influenced by domestic monetary policy, without significant trend changes.

1. The progress of the US-Iran conflict remains uncertain: The current conflict is still in dynamic evolution, and the blockade status of the Strait of Hormuz, the escalation of military actions, or the pace of diplomatic negotiations are difficult to predict accurately, which will also influence judgments on oil prices.

2. The calculations of oil prices’ impact on PPI and CPI may have biases: The impact of oil prices on PPI and CPI is influenced by multiple factors, including exchange rate fluctuations, corporate inventory strategies, and government price interventions. Empirical models typically extrapolate based on historical parameters, but the supply-demand structures, market expectations, and policy environments of each shock vary, leading to fluctuations in oil price elasticity coefficients. Therefore, quantitative estimates may overestimate or underestimate the actual impact extent.

3. Underestimation of cyclical forces may lead to deviations in PPI and CPI transmission efficiency: The transmission of PPI to CPI is not a mechanical linear process but depends on the stage of the economic cycle. Misjudging the cyclical position may result in significant deviations in estimates of inflation transmission efficiency.

4. Policy countermeasures may exceed expectations: To cope with imported inflation pressures, macro policies may adopt various measures such as reserve releases, price subsidies, tariff adjustments, and maintaining production and supply. If the strength or pace of policies exceeds expectations, it can effectively stabilize price fluctuations in the short term, weaken the transmission of oil price shocks to terminal prices, and change the original price transmission paths.

External release date: March 26, 2026

Research release institution: Changjiang Securities Research Institute

Participants’ information:

Yu Bo SAC No.: S0490520090001 SFC No.: BUX667 Email: yubo1@cjsc.com.cn

Song Xiaoxiao SAC No.: S0490520080011 SFC No.: BVZ974 Email: songxx3@cjsc.com.cn

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