Zhang Yu: Six Judgments on Inflation

Text: ****Huachuang Securities Chief Economist Zhang Yu License Number: S0360518090001

****Contact: ********Fu Chunsheng(18482259975) ****

Core Viewpoints

The situation in the Middle East is changing rapidly, and oil prices are moving accordingly. Market attention to inflation has significantly increased. This report focuses on oil prices and domestic inflation this year, analyzing six “core” issues.

一、How does oil price impact inflation in multiple dimensions?

Regarding the direct impact of oil prices on domestic inflation, we previously estimated in the report “Oil Price Rise, How Much Does It Affect US and China Inflation?” From an industry classification perspective, a 10% increase in oil prices short-term boosts PPI by about 0.3-0.4 percentage points; a 10% rise in oil prices increases China’s CPI by approximately 0.15 percentage points, mainly through the “international oil price - refined oil price - energy used in transportation” pathway, with less impact via industrial raw material inputs.

Beyond direct effects, we highlight three key indirect impacts:

First, policy buffers dilute the shock of oil price surges. To counter abnormal international oil price increases and ease downstream user burdens, the National Development and Reform Commission (NDRC) implemented temporary controls on refined oil prices. Objectively, this removed a 12% gasoline price increase. “According to the current pricing mechanism, on March 23, domestic gasoline and diesel prices ( standard products) should have increased by 2,205 yuan and 2,120 yuan per ton respectively; after regulation, actual increases were 1,160 yuan and 1,115 yuan,” resulting in a month-on-month CPI impact of “lowering” by 0.4%, and a possible month-on-month PPI impact of “lowering” by 0.2%.

Second, oil prices drag down copper prices and push up thermal coal prices.

High oil prices may suppress global copper demand, thereby dragging down copper prices. A 10% sustained increase in oil prices could slow global economic growth by 0.1-0.2%, with copper demand elasticity to global GDP roughly 1.26 times. If oil prices rise by 50%, global GDP could decline by 0.5-1%, and copper demand growth could be revised down by 0.6-1.3% (average copper consumption growth 2019-2025 is about 2.45%), with short-term copper price demand elasticity around -0.05 to -0.12, implying a possible decline of about 6-25%.

Oil prices also influence coal prices: “Oil price rise → increased economic viability of coal chemical industry → higher demand for chemical-grade coal → rising coal prices.” Based on empirical and academic research (Zhou et al.(2026)), a 10% increase in oil prices could drive coal prices up by approximately 2.57% to 3.5%.

Third, rising petroleum product prices have the greatest impact on the full costs of mining and upstream industries. In contrast, rising non-ferrous metal prices mainly affect the full costs of midstream manufacturing industries.

二、What is the endogenous repair momentum and sustainability of inflation this year beyond oil prices?

From the perspectives of cycle, macro leading indicators, and industry supply-demand, looking at PPI: First, the shortest upward cycle for the PPI base index is 16 months; the average upward cycle is 36 months. The current rebound has lasted only 5 months. Second, the gap between corporate and household deposit growth rates and M1 YoY indicates that PPI YoY will rise this year. Third, the supply-demand pattern in midstream manufacturing is currently the best (whether measured by investment growth potential or non-liquid asset growth, the conclusion is consistent). Horizontally, it outperforms mining + upstream (excluding crude oil and non-ferrous metals) and downstream consumer goods; vertically, it is better than 2021, the best since 2012. The sustained price increase in midstream manufacturing is the strongest endogenous repair driver for PPI, with demand-supply growth rate gaps leading YoY PPI by about a year. The supply-demand in mining + upstream (excluding crude oil and non-ferrous metals) and downstream consumer sectors remains weak, lacking upward price signals.

CPI focus: First, three categories of durable goods (cars, mobile phones, home appliances) may shift from policy-driven to cost pass-through. Second, price recovery in competitive service sectors (excluding medical, communication, postal, and education services) needs further observation in subsequent months. Details in main text.

三、How to observe PPI price transmission?

Two misconceptions about price transmission: First, it’s incorrect to judge whether transmission is smooth simply by upstream price increases and mid/downstream prices remaining unchanged, because during PPI recovery cycles, nearly all industries tend to see rising prices overall, just at different times or stages. Second, closer to downstream, smaller price increases do not necessarily indicate poor transmission, because the proportion of mining and upstream intermediate inputs in total industry input costs decreases as you approach downstream, naturally reducing the impact of raw material price increases.

Use the “cost transmission coefficient” to assess the transmission capacity of midstream manufacturing and downstream consumer goods industries. A complete cycle is formed by the PPI base index’s upward and downward phases. Comparing February 2016–December 2019, June 2020–August 2025, and September 2025–February 2026 (incomplete), the cost transmission in midstream manufacturing has been strengthening with faster transmission times; in downstream consumer goods, transmission has been relatively smooth each cycle. Data details in main text.

For midstream manufacturing alone, increased transmission capacity and shorter transmission times may be because each of the last three cycles saw better supply-demand patterns than the previous. Horizontally, downstream consumer goods have better transmission capacity than midstream manufacturing, possibly because: 1) mostly non-durables with relatively rigid demand; 2) high product heterogeneity and brand effects; 3) small and frequent price increases that are less noticeable.

四、How to interpret whether PPI increases are “good” or “bad”?

If PPI rises mainly due to supply-side factors and cost increases, the market tends to see it as “bad” (stagnant growth). If driven by supply-demand improvements, it is viewed as “good” (recovery/overheating), and traded accordingly. However, distinguishing supply and demand influences on PPI at the price level is difficult.

As a fallback, observe the relationship between PPI and sales profit margins in midstream manufacturing and downstream consumer sectors. If both rise together, it indicates “good” price increases; if prices rise but profit margins decline, it may mean price hikes are not increasing profits, indicating “bad” price increases.

Historically, during the early and middle phases of PPI recovery, both prices and profit margins rose in tandem. During the 2016–2018 PPI uptrend (with continuous base index increases), 2016–2017 was “good,” but 2018 was “bad” (midstream manufacturing data diverged, downstream still rising; Wind All A peaked in January 2018). In the 2020–2022 cycle, the period from late 2020 to mid-2021 was “good,” while late 2021 to 2022 was “bad” (Wind All A peaked in December 2021, but the latter half of 2021 was mostly high-level oscillation with limited gains).

五、How will profit trends and patterns change with PPI rebound this year?

It is expected that industrial enterprise profits will significantly rebound YoY this year, pointing to an upward trend in Wind All A profit growth. Industrial profits YoY ≈ industrial added value YoY + PPI YoY + profit margin YoY. Assuming profit margin remains unchanged (in reality, overall industrial profit margins recovered in 2016–2017 and 2020–2021), industrial added value YoY is projected at about 5.5–6%. With the PPI YoY center around 1%, overall profit growth could be notably higher this year, compared to 0.6% in 2025 and -3.3% in 2024.

In previous PPI recovery cycles (2016–2018, 2020–2022), profits in mining and upstream sectors expanded, with profit shares in these chains increasing simultaneously, while midstream manufacturing and downstream consumer goods’ profit shares declined. This cycle may differ: first, given the excellent supply-demand pattern and enhanced cost transmission in midstream manufacturing, profit share may oscillate upward; second, profit shares in mining and upstream chains may diverge—oil chain profits could recover, but the domestic upstream raw material supply-demand remains weak, limiting profit share growth; third, the profit share change in downstream consumer goods remains uncertain.

六、What is the inflation outlook this year? Under the baseline scenario, moderate recovery is likely

For PPI, YoY is very likely to turn positive in March, but due to high oil price volatility and some increases reflected in April, market forecast variance in March will be large. For the full year, if oil prices fall back to $70–80/barrel by late April and stay there, the PPI YoY center could be about 1.1%, with monthly peaks around 2–2.5%; if oil prices stay at $100–120/barrel through the year, the PPI YoY center could be about 2–2.5%, with monthly peaks near 4%.

For CPI, the full-year outlook: if oil prices fall back to $70–80/barrel by late April and remain, the CPI YoY center could be about 1.1%, with monthly peaks around 1.5–2%; if oil prices stay at $100–120/barrel, the CPI YoY center could be about 1.5%, with monthly peaks near 2–2.5%.

Risk warning: Data estimates may deviate; uncertainties in Middle East geopolitical situation.

Main Report Content

The evolving situation in Middle East geopolitical conflicts is highly volatile, and oil prices are moving accordingly. Market focus on inflation has clearly increased. This report revisits six “core” questions centered on oil prices and domestic inflation this year.

1. How does oil price impact inflation in multiple dimensions?

Regarding the direct impact of oil prices on domestic inflation, our previous estimate in the report “Oil Price Rise, How Much Does It Affect US and China Inflation?” shows: from an industry perspective, a 10% increase in oil prices short-term boosts PPI by about 0.3–0.4 percentage points; a 10% rise in oil prices increases China’s CPI by approximately 0.15 percentage points, mainly through the “international oil price - refined oil price - energy used in transportation” pathway, with less impact via industrial raw material inputs.

Beyond direct effects, we emphasize three indirect impacts:

First, policy buffers dilute the shock of oil price surges. To counteract abnormal international oil price increases and reduce downstream user burdens, the NDRC implemented temporary controls on refined oil prices. Objectively, this prevented a 12% gasoline price increase. “Based on the current pricing mechanism, on March 23, domestic gasoline and diesel prices standard products should have increased by 2,205 yuan and 2,120 yuan per ton respectively; after regulation, actual increases were 1,160 yuan and 1,115 yuan,” leading to a month-on-month CPI impact of “lowered” by 0.4%, and a possible month-on-month PPI impact of “lowered” by 0.2%.

Second, oil prices drag down copper prices and push up thermal coal prices:

High oil prices may suppress global copper demand, dragging down copper prices. A 10% sustained increase in oil prices could slow global economic growth by 0.1–0.2%, with copper demand elasticity to global GDP roughly 1.26 times. If oil prices rise by 50%, global GDP could decline by 0.5–1%, and copper demand growth could be revised down by 0.6–1.3% (average copper consumption growth 2019–2025 is about 2.45%), with short-term copper price demand elasticity around -0.05 to -0.12, implying a decline of about 6–25%.

Oil prices also influence coal prices: “Oil price rise → increased economic viability of coal chemical industry → higher demand for chemical-grade coal → rising coal prices.” Based on empirical and academic research (Zhou et al.2026), a 10% increase in oil prices could drive coal prices up by approximately 2.57% to 3.5%.

Third, rising petroleum product prices have the greatest impact on the full costs of mining and upstream industries. In contrast, rising non-ferrous metal prices mainly affect the full costs of midstream manufacturing industries.