Is U.S. inflation pressure just beginning? "Oil price shock" is only immediate, and China's PPI has already turned positive.

Is U.S. inflation pressure just beginning? "Oil price shock" is only immediate, and China's PPI has already turned positive.

U.S. March CPI data surged unexpectedly, but this may be just the beginning of inflationary pressure. Beyond the energy shock, a deeper re-inflation signal is quietly taking shape in China—historical data shows that China's imported price pressures have a significant leading effect on U.S. CPI.

According to a WallStreetCN article, data released by the U.S. Bureau of Labor Statistics on Friday showed that March CPI rose 3.3% year-on-year and 0.9% month-on-month, marking the largest single-month increase since June 2022. Gasoline prices hit the largest monthly increase since records began in 1967, contributing nearly three-quarters of the monthly rise.

At the same time, according to a WallStreetCN article, data released earlier on Friday showed China’s March PPI surged to a 0.5% year-on-year increase, the highest level since 2022, jumping 1.4 percentage points from the previous -0.9%, ending a nearly two-year deflation period.

Two forces are synchronously transmitting to U.S. inflation: one is the energy shock from the Middle East conflict, and the other is a systemic rebound in Chinese industrial prices. Shenwan Hongyuan Research pointed out, if crude oil spot prices remain above $110/barrel through May, China's PPI year-on-year may further rise to about 2.0% in April and May.

Currently, the market has begun to reprice the persistence of inflation. CPI fixed rate swap market shows one-year inflation expectations have risen above 3%, while at the onset of the Middle East conflict, distant swap pricing was little changed from pre-war levels. The Fed’s current benchmark interest rate remains in the 3.50% to 3.75% range; the March meeting minutes indicate more officials believe rate hikes may need to be considered again, and the possibility of rate cuts this year has narrowed considerably.

Energy shock dominates currently—U.S. gasoline prices break 57-year record

The core driving force of U.S. inflation in March was highly concentrated in energy.

Data showed energy CPI rose 10.9% month-on-month, the largest since September 2005; gasoline prices soared 21.2% month-on-month (24.9% before seasonal adjustment), fuel oil rose 30.7% month-on-month, the largest since February 2000. The energy component contributed nearly three-quarters of the overall month-on-month rise in CPI.

Excluding food and energy, core CPI only rose 0.2% month-on-month, below market expectations of 0.3%, providing brief comfort. But economists widely warn, core inflation has not yet fully digested the secondary transmission effects from this energy shock—high-price jet fuel will push up airfares, Delta Air Lines has issued price hike warnings; rising diesel costs will transmit to road transportation, further raising prices for various consumer goods; higher fertilizer prices are expected to ultimately lead to more expensive grocery bills.

Meanwhile, the sweeping tariffs implemented by the Trump administration continue to transmit to the consumer side, further weakening the cooling momentum of inflation and partly offsetting the deflationary trend in rents.

China's PPI turns positive—imported inflation signals can't be ignored

While the market is focused on the Middle East, re-inflation signals from China are quietly accumulating. China’s March PPI rose 0.5% year-on-year, jumping significantly from the prior -0.9%, the highest since 2022.

Market analysts point out that the trend in China’s input prices is a strong leading indicator for U.S. CPI, and currently, China’s input prices are sharply rising.

Historically, the accumulation of price pressure in China often transmits to U.S. consumption within months, meaning that even setting aside the energy shock, China's re-inflation trend alone is enough to give upward momentum to U.S. inflation.

Shenwan Research’s structural analysis of China’s PPI further reveals that this round of price increase is not just driven by crude oil. March PPI rose 1% month-on-month; international oil prices rose 21.9% month-on-month, driving domestic oil, gas extraction and related industry PPI higher.

Meanwhile, the rapid short-term rise in oil prices directly hit industrial production in downstream and midstream chemical sectors, shrinking supply in mid-to-downstream amplified the price rise—oil processing (+5.8% m/m), chemical raw materials (+3.6%), chemical fibers (+3.4%), all rose more than the historical transmission experience, Shenwan estimates crude oil plus mid-to-downstream supply contraction contributed a total of 0.7 percentage points to PPI m/m, the largest contribution.

In non-ferrous metals, despite a 3.1% m/m drop in copper prices, rare earths (+11.8% m/m), aluminum smelting (+0.7%) and other non-ferrous metals saw large increases, driving PPI for nonferrous mining up 5.4% m/m, nonferrous rolling up 1%, adding about 0.1 percentage points to overall PPI. Coal and steel price increases were relatively limited, contributing close to zero to PPI m/m.

Second quarter PPI may continue upward, futures-spot inversion poses hidden risks

Shenwan Research points out that the current inversion between crude oil futures and spot prices means China’s PPI could still surge in Q2. Currently, crude oil futures have fallen back to $100–110, reflecting adjusted market expectations, but spot prices remain high at around $130.

According to Shenwan calculations, if crude oil spot prices stay above $110/barrel through May, China’s PPI year-on-year could further rise to about 2.0% in April–May.

On the CPI front, surging oil prices will transmit to consumption via two pathways: "oil price—refined oil CPI" and "PPI—core commodity CPI". Q2 China CPI y/y is expected to rise again, likely centering around 1.3%.

The implications for U.S. inflation from this channel cannot be underestimated. Analysis points out, pricing pressures from China and energy will intertwine and reinforce each other over the coming months, forming a compounding effect.

Fed faces dilemma, real interest rate under pressure

Facing dual inflation pressures, the Fed’s policy space is being further squeezed. The Fed’s March meeting minutes show more policymakers believe rate hikes may need to return to the table, and some economists think rate cuts are highly unlikely this year.

The Fed can do very little in response. Real interest rates are already facing significant downward pressure—market expects real rates to drop sharply over the next year from pre-war 75–100 basis points to about 25–50 basis points. Such a decline in real rates will further fuel inflation expectations, and long-end yields will find it hard to ignore this in the long term.

CPI fixed rate swap market pricing changes confirm this judgment: one-year inflation expectations have risen above 3%, while at the onset of the Middle East conflict, distant swap pricing was little changed from pre-war levels; market expectations for the persistence of the inflation shock have fundamentally shifted.

Nevertheless, some economists believe the window for rate cuts has not completely closed. If labor market conditions worsen, there is still room for policy adjustment. But the current inflation trajectory has clearly narrowed the Fed’s operating space between balancing price stability and economic growth, and imported inflation pressures from China are becoming an unignorable variable in this inflation game.

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