Kaiyuan Securities: Geopolitical Conflicts May Increase PPI Upward Magnitude and Persistence

Open Source Securities points out that, based on China’s 2023 input-output table, the consumption coefficients of various PPI sub-industries 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 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 Persistence 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 recent 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 exceeded 0.4% for two consecutive months, reaching new highs since 2024. The main contribution to the recent MoM increase comes from the non-ferrous metal smelting and rolling processing 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 mid to 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 through late March to April, and the YoY PPI may turn positive as early as March.

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

(1) Assuming no geopolitical conflict, AI industry investment demand will likely promote YoY PPI to turn positive throughout the year

Historically, significant and sustained PPI increases are mostly driven by global price rises. Before the Middle East conflicts, the YoY PPI improvement was also driven by external demand factors: AI industry investments became a key macro demand driver, with rapid price increases in the non-ferrous metal chain and high-end manufacturing sectors such as electrical equipment and electronic computers. Additionally, global supply chain reshuffling 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 governance of 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 in 2026 could turn positive. This suggests that even without Middle East conflicts, a YoY PPI positive in 2026 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 persistence of PPI rises

Using China’s 2023 input-output table, the consumption coefficients of various PPI sub-industries 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 impact on PPI cost transmission is derived. The results show that the complete 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. Persistent geopolitical conflicts will likely increase both the magnitude and duration of future PPI increases.

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

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

(1) Near-term: Based on the 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 onward, the PPI MoM central tendency will follow the average of the past five years (about 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 around 0.9%, and CPI around 1.4%. Other scenarios will be adjusted based on these principles.

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

Scenario 1: If subsequent conflicts escalate sharply, WTI crude oil prices centralize around $160/barrel, and YoY PPI and CPI in 2026 are approximately 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, and YoY PPI and CPI in 2026 are approximately 3.4% and 1.6%, respectively.

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

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

(Source: First Financial)