Measuring inflation impacts on China from higher oil prices
Oil prices have risen sharply since late February due to the Middle East conflict, renewing concerns around China’s inflation trajectory. Elevated commodity prices have also prompted questions about the implications for Chinese corporates and China’s broader inflation outlook.
Reflecting on the latest upward revisions to global oil forecasts, we now expect both Consumer Price Index (CPI) and Producer Price Index (PPI) inflation to reach around 1.0% in 2026, with PPI likely turning positive as early as March or April. Upside risks persist given the unusual volatility in global energy markets.
Source: China National Bureau of Statistics (NBS). Monthly data as of February 2026 as at 25 March 2026.
That said, China’s effective exposure to energy-supply disruptions is lower than headline import-dependence figures imply. Roughly 30% of crude oil imports and only 6% of natural gas imports transit the Strait of Hormuz1—limiting the direct pass-through from Middle East supply shocks.
In addition, China’s rapid build-out of renewables and alternative energy capacity, along with a structurally lower reliance on oil and gas in its energy mix, limits imported inflation pressures2.
Our estimates indicate that a 10% increase in oil prices could raise PPI by roughly 0.5 percentage points over 12 months and CPI by about 0.1 percentage point.3
The PPI impact tends to be front-loaded and temporary, characteristic of supply-driven shocks. China’s domestic fuel-pricing mechanism is expected to further dampen CPI pass-through4; for example, the National Development and Reform Commission (NDRC) has already taken temporary measures to smooth domestic refined-fuel prices and slow the pace of retail gasoline adjustments.5
Source: China National Bureau of Statistics (NBS) and Invesco calculations. Annual data as of 2025 as at 25 March 2026.
Historically, energy-driven PPI gains have been concentrated in upstream industrial sectors, which account for most headline PPI increases despite representing a smaller share of the index.6
Spillovers into core CPI remain minimal—a 1% rise in PPI translates into only about 5 basis points of core CPI—indicating that higher commodity prices alone are unlikely to trigger a broad-based or sustained reflation cycle.7
At the enterprise level, higher input costs present a familiar dilemma: raise prices or accept margin compression. In previous years, firms in highly competitive industries often preferred to sacrifice margins to preserve market share.
However, with domestic demand strengthening in recent months and early evidence that “anti-involution” policies are reducing excess capacity, more companies now appear willing to lift prices.
If both demand-pull momentum and supply-side rationalization are sustained, these conditions could mark the beginning of the long-anticipated reflationary cycle.
China macro markets update
Global equities have seen broad-based corrections due to the Iran conflict, but onshore China and US equities have outperformed in March, while Korea, Taiwan, and India stock markets have absorbed the brunt of the selling pressure.
Despite intensifying global growth headwinds, China’s large, diversified economy is comparatively well positioned for extreme macro scenarios. Years of investment in energy security, food security, and supply-chain self-reliance have strengthened macro resilience.
China also benefits from large domestic coal reserves, rapid renewable-energy expansion, high crude stockpiles, and relatively low dependence on Middle East oil, making it more tolerant of energy-driven inflation than many peers.
From a market perspective, MSCI China now trades near ~11x forward earnings8, with low investor positioning and subdued expectations. This could set the stage for upside in the near term, supported by value-seeking domestic and global investors.
As investors have remained structurally underweight energy in recent years, the Iran conflict is a reminder of the importance of diversification.
It remains sensible, in our view, to continue building exposure to China’s energy related segments, particularly renewables, EVs, EV batteries, and grid infrastructure, which are central to China’s long term energy strategy and less vulnerable to global commodity volatility.
Investment risks
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