China: Oil boosts PPI but CPI Less
• Given lags and the still elevated oil prices for Q2/Q3 delivery it is likely that PPI will be further boosted in the coming months. This could boost 2026 China CPI by around 0.3-0.4% and we changed our 2026 forecast to 1.4% in the March Outlook (here) -- the higher price of Fertilizers will also have an impact, which could also boost Food prices later in the year. In 2027, with an excess of production versus domestic demand, the underlying disinflation will reappear and keep China CPI weak. We forecast +0.1% for 2027 China CPI inflation.
Figure 1: China CPI and PPI (Yr/Yr %)
Source: Datastream/Continuum Economics
The March China CPI and PPI show some of the forces impacting inflation trends. Key points include
• Higher oil prices starting to feedthrough. PPI swung back into positive territory on a Yr/Yr basis (Figure 1), as higher oil prices from the Iran war feedthrough. Given lags and the still elevated energy prices for Q2/Q3 delivery it is likely that PPI will be further boosted in the coming months. However, the CPI impact has been controlled, which reflects initial restrictions on the feedthrough of global oil prices. It will still likely feedthrough to CPI later in the year, as China appears reluctant to undertake a major release of commercial and strategic oil stockpiles. This could boost 2026 CPI by around 0.3-0.4% and we changed our 2026 forecast to 1.4% in the March Outlook (here) -- the higher price of Fertilizers will also have an impact, which could also boost Food prices later in the year.
• 2027 lower inflation. Even so, the boost to China CPI is unlikely to last. Though the Iran/U.S. 2 week ceasefire is fragile, neither Iran or the U.S. want to restart the war and we take the view that a partial reopening of the Straits of Hormuz will occur and ease oil/gas and fertilizer pressures (here). Indeed, we forecast that oil prices will come down over the next 3 quarters back towards pre war levels, which will mean that energy prices subtract from CPI in 2027. With an excess of production versus domestic demand, the underlying disinflation will reappear and keep China CPI weak. We forecast +0.1% for 2027 China CPI inflation.