Open Source Securities: Geopolitical conflicts may increase the magnitude and duration of PPI upward movement

Open Source Securities points out that, based on China’s 2023 input-output table, the consumption coefficients of various PPI sub-sectors for oil and gas extraction, coal mining, and non-ferrous metal mining are calculated. Using the proportion of above-scale enterprise revenue in these industries in 2025 as weights, the combined impact on PPI cost transmission is obtained. The results show that the complete cost transmission coefficient for oil and gas extraction is approximately 9.7%, while for non-ferrous metal mining it is only 1.9%. This indicates that even if rising oil and gas prices lead to inflation and recession expectations that may suppress further increases in the non-ferrous metal chain, their impact on downstream industry prices is much higher than that of the non-ferrous metal chain. If geopolitical conflicts persist, they will increase the magnitude and duration of future PPI increases.

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Inflation Upside and Duration May Exceed Expectations—Scenario Analysis Based on Crude Oil Prices—Macroeconomic Special Topic - 20260324

1. Recent PPI increases are mainly driven by metals; crude oil prices may help turn YoY PPI positive in March-April

(1) Recent PPI rise is primarily contributed by input factors in the metal chain

The YoY PPI has risen rapidly from -3.6% in July 2025 to -0.9% in February 2026. Since the beginning of 2026, the MoM PPI has reached a new high of 0.4% for two consecutive months since 2024. The main contribution to recent MoM increases comes from the non-ferrous metal smelting and rolling industry within input factors, which contributed 0.36 and 0.32 percentage points respectively in January-February 2026.

(2) Crude oil prices may help turn YoY PPI positive in March-April

Following Middle East geopolitical conflicts, crude oil prices surged, while copper prices declined. High-frequency data fitting as of late March suggests March MoM PPI around +0.6%, likely driven by the petrochemical chain within input factors. Crude oil prices are expected to remain high from late March to April, with the earliest possible YoY PPI turning positive in March.

2. Crude oil cost transmission is about five times that of non-ferrous metals; geopolitical conflicts may increase the magnitude and duration of PPI rises

(1) Assuming no geopolitical conflict, AI industry investment demand will likely push YoY PPI positive for the whole year

Historically, significant and sustained PPI increases are mostly driven by global price rises. Before the Middle East conflicts, YoY PPI improvements were mainly driven by external demand factors: AI industry investments became key macroeconomic demand drivers, with rapid price increases in the non-ferrous metal chain and high-end manufacturing sectors like electrical equipment and electronic computers. Additionally, global supply chain reshaping and resource hoarding amid anti-globalization trends also boosted demand for non-ferrous metals. Domestically, in July 2025, the Central Financial and Economic Affairs Commission emphasized regulating low-price, disorderly competition among enterprises, leading to noticeable marginal changes in prices of coal, real estate, and general consumer goods.

With improved supply-demand dynamics, from July 2025 to February 2026, the average MoM PPI was about 0.13%. As long as MoM PPI remains above -0.08% over the next ten months, the YoY PPI could turn positive in 2026. This suggests that even without Middle East conflicts, a YoY PPI increase within the year is highly probable.

(2) Crude oil cost transmission impact is about five times that of non-ferrous metals; geopolitical conflicts may increase the magnitude and duration of PPI increases

Using China’s 2023 input-output table, the consumption coefficients of various PPI sub-sectors for oil and gas extraction, coal mining, and non-ferrous metal mining are calculated. Weighting by the proportion of above-scale enterprise revenue in 2025, the results show that the total cost transmission coefficient for oil and gas extraction is about 9.7%, while for non-ferrous metal mining it is only 1.9%. This indicates that although rising oil and gas prices may suppress further increases in the non-ferrous metal chain due to inflation and recession expectations, their impact on downstream prices is much higher than that of the non-ferrous metal chain. If geopolitical conflicts continue, they will increase the magnitude and persistence of future PPI increases.

3. If crude oil prices rise to $160 per barrel, YoY PPI in 2026 is expected to reach about 5.0%

(1) Before scenario analysis, clarify the prediction principles for near-term and long-term MoM PPI

(1) Near-term: Based on latest high-frequency data fitting, March 2026 MoM PPI is around +0.6%, and CPI MoM around +0.1%; (2) Long-term: Assuming no conflicts, from April 2026 onwards, the PPI MoM central tendency will follow the average of the past five years (0.02%), and CPI MoM will follow about 70% of the recent three-year seasonal level. Under these assumptions, the YoY PPI in 2026 could be about 0.9%, and CPI about 1.4%. Other scenarios will be adjusted accordingly.

(2) Scenario analysis: If crude oil prices rise to $160 per barrel, YoY PPI is expected to be about 5.0%

Scenario 1: If subsequent conflicts escalate sharply, WTI crude oil prices centralize around $160/barrel, YoY PPI and CPI in 2026 are projected at about 5.0% and 2.0% respectively. If the government moderately regulates coal prices, YoY PPI may be lower.

Scenario 2: If conflicts persist partially, WTI crude oil prices centralize around $120/barrel, YoY PPI and CPI in 2026 are projected at about 3.4% and 1.6% respectively.

Scenario 3: If conflicts ease, WTI crude oil prices fall to around $80/barrel, YoY PPI and CPI in 2026 are projected at about 1.8% and 1.4% respectively.

Risk Warning: The calculation of price transmission coefficients may contain errors; actual PPI transmission effects may be less than the complete transmission coefficient; PPI’s transmission to CPI may be underestimated.

(Source: First Financial)