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 $119.5 per barrel, nearly doubling from the January average of $63.6 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, since prices in China have been steadily improving before this increase, will this situation break the low-inflation trend like the Russia-Ukraine conflict did for Japan in 2022? Third, how much does the rise in oil prices impact profits across various industries, and which sectors face cost pressures?

How Much Does the Rise in Oil Prices Affect CPI and PPI?

From an input-output model perspective, a 10% increase in oil prices leads to 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. An increase in oil prices means higher costs, which are transmitted step-by-step along the industrial chain. When oil prices rise by 10%, PPI increases by 0.65 percentage points and CPI by 0.25 percentage points. The model assumes that upstream price increases are fully transmitted downstream, ignoring transmission delays and the effects of financial markets and expectations. This is an idealized scenario and may overestimate the actual impact when considering only cost transmission.