The sudden surge in the US March CPI data may only mark the beginning of inflationary pressures. Beyond the energy shock, a deeper reflation signal is quietly taking shape in China—historical data indicates that China's imported price pressures have a significant leading effect on US CPI. Data released by the US Bureau of Labor Statistics on Friday showed the March CPI rose 3.3% year-on-year and 0.9% month-on-month, the largest monthly increase since June 2022. Gasoline prices recorded their largest monthly jump since records began in 1967, contributing nearly three-quarters of the monthly increase almost single-handedly. Simultaneously, data released earlier on Friday showed China's March PPI jumped to a 0.5% year-on-year increase, the highest level since 2022, a sharp rise of 1.4 percentage points from the previous -0.9%, ending a nearly two-year period of deflation. Two forces are simultaneously transmitting inflation to the US: one is the energy shock triggered by conflict in the Middle East, and the other is the systemic recovery of Chinese industrial prices. Shenwan Hongyuan Research points out that if crude oil spot prices remain above $110 per barrel through May, China's PPI could potentially climb further to around 2.0% year-on-year in April-May. Currently, markets have begun repricing the persistence of inflation. The CPI fixed-rate swap market shows one-year inflation expectations have risen above 3%. In contrast, long-dated swap pricing was little changed from pre-conflict levels immediately after the Middle East conflict erupted. The Federal Reserve's current benchmark interest rate remains in the 3.50% to 3.75% range. The March meeting minutes indicated that a growing number of officials believe the option of raising rates might need to be reconsidered, and the possibility of rate cuts this year has narrowed significantly.
The core driver of US inflation in March was highly concentrated in energy. Data shows the Energy CPI rose 10.9% month-on-month, the largest monthly increase since September 2005. Gasoline prices surged 21.2% seasonally adjusted, while fuel oil prices rose 30.7% month-on-month, the largest monthly increase since February 2000. The energy component alone contributed nearly three-quarters of the overall monthly CPI increase. Core CPI, excluding food and energy, rose only 0.2% month-on-month, below market expectations of 0.3%, providing brief relief. However, economists widely warn that core inflation has not yet fully absorbed the secondary transmission effects of this energy shock. High-priced jet fuel will push up airfare costs, with Delta Air Lines already issuing a price hike warning. Rising diesel costs will transmit to road transport, subsequently pushing up prices for various consumer goods. Increasing fertilizer prices are expected to ultimately lead to higher grocery bills. Meanwhile, the broad tariff policies implemented by the previous administration continue to transmit to the consumer end, further weakening disinflation momentum and partially offsetting the disinflationary trend in rents.
While market focus is on the Middle East, reflation signals from China are quietly accumulating. China's March PPI rose 0.5% year-on-year, a significant jump from the previous -0.9%, reaching its highest level since 2022. Market analysts note that the trend of Chinese input prices has strong leading indicator significance for US CPI, and these input prices are currently rising sharply. Historically, the buildup of price pressures in China often transmits to the US consumer end several months later. This implies that, even setting aside the energy shock, China's reflation trend alone could provide sufficient upward momentum for US inflation. A structural analysis by Shenwan Research further reveals that this round of price increases is not solely driven by crude oil. The March PPI rose 1% month-on-month. International oil prices rose 21.9% month-on-month, driving up PPI in related domestic sectors like oil and gas extraction. Concurrently, the sharp, rapid rise in oil prices directly impacted mid- and downstream industrial production in the petrochemical chain. Supply contraction in these mid- and downstream sectors amplified the price increases—price rises in sectors like petroleum processing (+5.8% MoM), chemical raw materials (+3.6%), and chemical fibers (+3.4%) all exceeded historical transmission patterns. Shenwan estimates that crude oil and mid/downstream supply contraction together contributed 0.7 percentage points to the monthly PPI increase, making it the largest contributing factor. Regarding non-ferrous metals, although copper prices fell 3.1% month-on-month, prices for other non-ferrous metals like rare earths (+11.8% MoM) and aluminum smelting (+0.7%) saw significant increases. This drove the PPI for non-ferrous mining and processing up 5.4% MoM and non-ferrous metal rolling up 1% MoM, contributing an additional approximately 0.1 percentage points to the monthly PPI. Price increases for coal and steel were relatively limited, contributing close to zero to the monthly PPI change.
Shenwan Research points out that the current price inversion between crude oil futures and spot prices suggests China's PPI could still see significant increases in the second quarter. While crude futures prices have retreated to around $100-$110, reflecting adjusted market expectations, spot prices remain elevated near $130. Shenwan estimates that if crude oil spot prices remain above $110 per barrel through May, China's PPI could potentially rise further to around 2.0% year-on-year in April-May. Regarding CPI, the oil price surge will transmit to the consumer end through two main channels: "oil prices -> refined oil product CPI" and "PPI -> core goods CPI." It is projected that China's CPI will resume its upward trend year-on-year in the second quarter, with a central tendency possibly around 1.3%. The implications of this pathway for US inflation should not be underestimated. Analysis indicates that the dual price pressures from China and energy will intertwine and reinforce each other in the coming months, creating a compounding effect.
Faced with dual inflationary pressures, the Federal Reserve's policy space is being further constrained. The Fed's March meeting minutes showed a growing number of policymakers leaning towards the view that the option of raising rates might need to be reconsidered. Some economists already believe the possibility of rate cuts this year is extremely low. The Fed has limited options to address this situation. Real interest rates are already under significant downward pressure—market expectations suggest the real rate over the next year could fall sharply from the pre-conflict 75-100 basis points to around 25-50 basis points. The decline in real rates itself could further fuel inflation expectations, and long-term yields are unlikely to ignore this development indefinitely. Pricing changes in the CPI fixed-rate swap market confirm this assessment: one-year inflation expectations have risen above 3%. In contrast, long-dated swap pricing was little changed immediately after the conflict began, indicating a substantive shift in market expectations regarding the persistence of the inflation shock. Nevertheless, some economists believe the window for rate cuts is not completely closed. If labor market conditions deteriorate, there remains room for policy path adjustment. However, the current inflation trajectory has significantly narrowed the Fed's operational space for balancing price stability and economic growth. Imported inflationary pressure from China is becoming a variable that cannot be ignored in this inflation battle.
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