Guan Tao: A Dialectical View of the Impact of High Oil Prices on China's Price Trends

The potential continuation of high oil prices may exceed expectations, which could both drive up global inflation and hinder worldwide economic growth.

On February 28, 2026 (local time), the U.S. and Israel suddenly launched a joint military operation against Iran (referred to as the “U.S.-Iran conflict”), intensifying tensions in the Middle East. Currently, it appears that the conflict is escalating and may become prolonged. The clash has damaged infrastructure in Middle Eastern oil-producing countries, reducing their oil output capacity. Meanwhile, Iran has effectively blocked the Strait of Hormuz, choking the world’s energy artery and disrupting international shipping. As a result, on March 9, the UK Brent crude spot price (same below) broke above $100 per barrel for the first time in over three years. After a brief retreat, prices rose again from March 12, closing at $117.08 on March 20. By March 20 (year-to-date), the average crude oil price increased by 34.7% year-over-year, ending 19 consecutive months of negative growth. Oil is the lifeblood of the modern economy; high oil prices push up transportation, industrial production, and household costs, leading to widespread price increases, which cast a shadow over global inflation and economic growth.

According to the National Bureau of Statistics, by February 2026, China’s Producer Price Index (PPI) had seen three consecutive months of narrowing declines year-over-year and five consecutive months of positive month-over-month growth, largely driven by rising international energy and non-ferrous metal prices. Tensions in the Middle East, high energy prices, and disruptions in international logistics will likely increase China’s imported inflation. However, given China’s long-term low inflation environment, this may help achieve a reasonable rebound in prices (i.e., re-inflation), with Japan serving as an example. At the same time, close attention should be paid to the potential challenges posed by the escalation of the U.S.-Iran conflict, such as global demand contraction and energy market volatility, which could impact China’s economic and financial stability, requiring preparedness on multiple fronts.

Imported Inflation Spurs Japan’s Economic Restart

Japan’s economy has been stagnant for a long time due to the bursting of its asset bubble. Despite the Bank of Japan implementing aggressive monetary easing measures—quantitative and qualitative easing in 2013 and negative interest rates in 2016—Japan has struggled to escape deflation. From April 2015 to March 2022, Japan’s 18-month Consumer Price Index (CPI) year-over-year change was negative, with 58 months within the 0-1% range (excluding), and 8 months between 1-2%. It was only after the COVID-19 pandemic caused global supply chain disruptions and the 2022 Russia-Ukraine conflict led to rising international commodity prices that Japan’s persistent deflation was cured through sustained imported inflation. From April 2021 to September 2023, Japan’s PPI inflation rose above 2%, pushing CPI inflation to exceed the 2% target for 45 consecutive months since April 2022 (see Chart 1).

When Japan’s inflation began to surge, it coincided with aggressive tightening by major global central banks, led by the Federal Reserve. However, it was only after domestic inflation expectations rose and the “wage-price spiral” was confirmed (see Chart 2) that the Bank of Japan raised its policy interest rate by 20 basis points to 0.1% in March 2024, ending its negative interest rate era. Subsequently, it raised rates by 15 basis points in August 2025, and by 25 basis points each in January and December 2026, gradually reducing bond purchases and steadily normalizing monetary policy.

The re-inflation has reset Japan’s economy, bringing several positive effects: first, improving the quality of economic growth. From 2022 to 2025, Japan’s real GDP grew at an average annual rate of 0.75%, with nominal GDP growing at 3.72% annually. In contrast, from 2013 to 2019 (excluding 2020 and 2021 due to pandemic-related volatility), real GDP grew at 0.74% annually, and nominal GDP at only 1.42%. Second, it eased the overall debt burden. From Q2 2022 to Q2 2025, Japan’s non-financial sector leverage ratio decreased by 39.8 percentage points, with household, non-financial corporate, and government leverage ratios falling by 2.2, 3.1, and 34.5 percentage points respectively. Conversely, from Q2 2015 to Q1 2022, leverage increased by 52.6 percentage points, with household, non-financial corporate, and government leverage rising by 20.8, 6.6, and 25.2 points. Third, asset prices have been boosted. Between 2022 and 2025, Japan’s stock market surged amid the yen hitting a 30-year low, with the Nikkei 225 reaching record highs, rising by 75% overall, and averaging 15% annual growth—faster than the 12% annual increase from 2013 to 2021.

China’s Two Near Misses with Re-Inflation

In the year before Japan’s CPI inflation reached the target—2021—China’s average annual CPI inflation was 0.9%, with PPI inflation at 8.1%. Japan’s figures were -0.3% and 4.6%, respectively. Clearly, China’s foundation for re-inflation was stronger than Japan’s. Starting in 2021, global high inflation returned, but Japan experienced re-inflation only in 2022, while China missed the opportunity.

Both China and Japan depend on imports of commodities, though to different degrees. Japan is resource-poor, with nearly 100% dependence on imports for crude oil, iron ore, copper, and aluminum, whereas China’s dependence ranges from 65% to 85%. For coal, Japan’s import reliance is 82-90%, while China’s is only 5.7%. Correlation analysis shows that from January 2018 to February 2026, China’s PPI inflation had a moderate positive correlation (0.718) with international commodity price inflation (measured by the Reuters/CRB monthly commodity price index year-over-year change), while Japan’s correlation was strong at 0.813 (see Chart 3). Japan’s higher correlation indicates that its import dependence makes its input-driven inflation more pronounced.

In 2021 and 2022, facing volatile international commodity prices, high global inflation, and domestic pandemic challenges, China adopted measures to stabilize supply and prices of key consumer goods and energy. For example, to address tight coal and electricity supplies, China deepened reforms to marketize coal-fired power prices, expanded price fluctuation ranges, and encouraged power plants to produce actively; it also held targeted talks with key enterprises in coal, steel, copper, and aluminum to curb hoarding and speculation; and it strengthened supervision of commodity futures and spot markets to crack down on price gouging and malicious speculation.

These measures proved effective. During the pandemic, the international Newcastle coal spot index’s monthly high was 7.6 times the low, while China’s Binhai Basin Power Coal Index (BSPI) only rose by 40%. Subsequently, international coal prices retraced by up to 78%, while domestic prices only fell by 10%. Similarly, London Metal Exchange (LME) three-month copper and aluminum futures prices increased by up to 1.02 and 1.37 times, respectively, while Shanghai Futures Exchange (SHFE) active contract prices for cathode copper and aluminum rose by 89% and 79%. Later, international copper and aluminum prices retraced by 26% and 38%, and domestic prices by 23% and 22%.

This weakened the transmission of imported inflation to China. From February 2021 to February 2023 (when international commodity prices rose year-over-year), Japan’s PPI inflation remained strongly positively correlated with international commodity inflation (correlation 0.850, slightly down from 0.882), while China’s correlation dropped to near zero (-0.068), indicating a decoupling (see Chart 3). Since October 2022, China’s PPI inflation has led international commodity inflation by five months, turning negative and remaining so for 41 consecutive months by February 2026.

Additionally, during the pandemic, China’s policies focused on stabilizing market entities, which preserved supply but led to excess capacity across the industrial chain. From February 2021 to February 2023, Japan’s PPI and CPI inflation had a moderate positive correlation (0.744), while China’s was nearly zero (-0.199). After China’s pandemic control measures eased at the end of 2022, the accumulated risks from pandemic scars and the “three-phase” overlay of fiscal and financial pressures continued to suppress domestic demand recovery. From March 2023 to February 2026, the correlation between China’s PPI and CPI inflation weakened to a mild positive (0.368), but since PPI remained negative from October 2022, it continued to drag down CPI inflation. Meanwhile, Japan’s correlation remained moderate at 0.510, with persistent high PPI inflation increasing CPI inflation stickiness (see Chart 4).

High Oil Prices Present Opportunities and Challenges for China

As the U.S.-Iran conflict escalates, global energy markets become more volatile, and the impact may extend beyond the conflict period. A recent Goldman Sachs report warns that the real threat to global oil prices is not the Strait of Hormuz itself, but physical destruction. If Iran and the Persian Gulf infrastructure suffer structural damage from attacks, with repair times measured in years, this could be the decisive factor determining whether oil prices stay around $70 or soar above $110. The IMF chief has noted that a 10% increase in energy prices sustained for a year could raise global inflation by 0.4 percentage points and slow economic growth by 0.1-0.2 percentage points. A recent Oxford Economics simulation suggests that if global oil prices stay around $140 per barrel for two months, combined with tightening financial conditions, ongoing supply chain disruptions, and declining market confidence, the Eurozone, UK, and Japan could experience mild recessions, while the U.S. economy might approach recession. Conversely, if prices stay around $100 per barrel, inflation would slow global growth slightly but avoid recession.

Thus, sustained high oil prices could surpass expectations, potentially fueling global inflation while also dampening economic growth. For China, this presents both opportunities and risks. On the positive side, higher oil prices could accelerate domestic inflation, aiding re-inflation, with some market forecasts suggesting PPI could turn positive by April 2026, and overall PPI and GDP deflator inflation could also turn positive. On the downside, rising oil prices could weaken external demand for Chinese products and exacerbate domestic supply-demand imbalances, possibly hindering price recovery.

In the face of complex external challenges, maintaining a certain tolerance for price increases is advisable. The Central Economic Work Conference in late 2025 emphasized continuing a moderately loose monetary policy and highlighted the importance of promoting stable growth and reasonable price increases—signaling that even if economic growth meets expectations, monetary policy will not tighten until inflation reaches target levels. As Japan’s experience shows, the BOJ did not exit negative rates immediately upon inflation reaching the target but waited until a wage-price spiral was confirmed. Similarly, China’s policymakers should signal readiness to support price increases, especially in cost-push inflation scenarios, and only consider policy easing once demand-driven inflation is confirmed. In 2021 and 2022, China’s annual PPI inflation was 8.1% and 4.2%, respectively, while CPI inflation was only 0.9% and 2.0%, still below the around 3% target. During that period, the People’s Bank of China (PBOC) maintained an accommodative stance, lowering reserve requirements and interest rates, which proved correct. From 2023 to 2025, China’s PPI remained negative, and CPI inflation hovered just above zero. Still, if the Middle East situation worsens, triggering a global slowdown or recession, monetary and fiscal policies will need to work together. The early budget arrangements help ensure fiscal sustainability and leave policy space for unforeseen shocks.

Amid deepening external uncertainties, it is crucial to firmly implement policies that stabilize the domestic economy and offset external risks. Focus on building a strong domestic market, problem-solving, and results-oriented reforms, combined with macro policies, to unblock economic bottlenecks and turn policy effects into endogenous growth drivers. Implement income-increasing measures for urban and rural residents, stimulate domestic consumption, improve service quality, streamline unreasonable restrictions, and foster new growth points in consumption. Support pilot programs like spring and autumn vacations for primary and secondary schools, and implement paid staggered leave for workers to enhance consumer spending power and leisure. Align with major projects in the 14th Five-Year Plan, focusing on new productivity, urbanization, and human development, to boost market-led investment and increase government spending on social welfare. Accelerate the development of new growth drivers and technological independence, using new demand to create new supply and vice versa, fostering healthy interactions between consumption, investment, supply, and demand for higher-level dynamic balance.

Further deepen the construction of a unified national market, smoothing the transmission from PPI to CPI inflation. Regulate local government economic promotion activities, issue clear lists of incentives and restrictions, standardize tax and subsidy policies, and reduce ineffective and excessive supply. Uphold rule of law and market principles, using capacity regulation, standards, price enforcement, and quality supervision to combat unhealthy competition. Promote win-win development for platform companies, operators, and workers, and curb low-price and bottom-price competition. Steadily advance price reforms in utilities and public services, improve price transmission mechanisms, and provide temporary subsidies to vulnerable groups if needed. During 2020-2022, China issued subsidies to help vulnerable populations cope with rising prices, benefiting 730 million people.

Furthermore, the uncertain outlook of the U.S.-Iran conflict increases market volatility, and high oil prices intensify expectations of monetary policy shifts among major central banks, causing turbulence in global stock, bond, currency, and commodity markets. These external shocks spill over into China’s financial markets through channels like foreign demand, cross-border capital flows, and investor expectations. Domestic authorities need to continuously refine policies to respond to external input risks, employing macroprudential and financial stability tools to mitigate or block external contagion. Market participants should strengthen monitoring and analysis of both domestic and international developments, assess their own external risk exposures, actively manage risks, and prepare contingency plans to safeguard stability.

(Author: Chief Economist, Bank of China Securities)