Can "input-driven price increases" break the deadlock of low inflation?

Since the Iran incident, the Strait of Hormuz has experienced blockades, leading to increased volatility in international oil prices. On March 9, Brent crude oil prices temporarily reached $119.50 per barrel, nearly doubling from the January average of $63.60 per barrel. How does the rapid rise in oil prices affect China’s economy? We focus on three questions: First, how significant is the quantitative impact of rising oil prices on China’s CPI and PPI? Second, before the oil price increase, prices in China had been steadily improving; will this situation, like Japan’s experience with low inflation during the Russia-Ukraine conflict in 2022, allow China to completely escape low inflation? Third, how much does the rise in oil prices impact profits across various industries, and which sectors face cost pressures?

Impact of Oil Price Rise on CPI and PPI

From an input-output model perspective, a 10% increase in oil prices results in a 0.65 percentage point rise in PPI and a 0.25 percentage point rise in CPI. Using the 2023 input-output table, we calculated the impact of oil price increases on PPI and CPI. The core idea of the input-output model is that crude oil is a cost input for other industries; when oil prices rise, costs increase. As the price increase propagates up the industry chain, a 10% rise in oil prices leads to a 0.65 percentage point increase in PPI and a 0.25 percentage point increase in CPI. The model assumes that upstream price increases fully transmit downstream, without considering transmission delays or the effects of financial markets and expectations. This is an idealized scenario and may overestimate the actual impact when considering only cost transmission.

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