US March CPI data suddenly heated up, but this may just be the beginning of inflationary pressure. Beyond the energy shock, a deeper reflation signal is quietly taking shape in China—and historical data shows that imported price pressure from China has a significant leading effect on US CPI.
According to a Wallstreetcn article, data released Friday by the US Bureau of Labor Statistics showed that March CPI rose 3.3% year-on-year and 0.9% month-on-month, the largest monthly increase since June 2022. Gasoline prices saw the largest monthly increase since records began in 1967, almost single-handedly contributing nearly three-quarters of the monthly increase.
Meanwhile, according to another Wallstreetcn article, data released earlier Friday showed that China's March PPI jumped 0.5% year-on-year, the highest level since 2022, a significant leap of 1.4 percentage points from the previous -0.9%, ending nearly two years of deflation.
Two forces are simultaneously transmitting to US inflation: one is the energy shock caused by the Middle East conflict, and the other is the systemic rebound in China's industrial prices. Shenwan Hongyuan Securities Research pointed out that if spot crude oil prices continue to remain above $110/barrel through May, China's PPI year-on-year may further surge to around 2.0% in April and May.
Currently, the market has begun to reprice inflation persistence. The CPI fixed-rate swap market shows that one-year inflation expectations have risen above 3%, while at the initial stage of the Middle East conflict, far-end swap pricing was similar to pre-war levels. The Fed's current benchmark interest rate remains in the 3.50% to 3.75% range. Minutes from the March meeting indicate that an increasing number of officials are leaning towards the view that rate hikes may need to be put back on the table, and the possibility of rate cuts this year has significantly narrowed.
<h2>Energy Shock Dominates Current Situation, US Gasoline Prices Hit 57-Year Record</h2>
The core driver of US inflation in March was highly concentrated in energy.
Data shows that energy CPI rose 10.9% month-on-month, the largest monthly increase since September 2005. Gasoline prices surged 21.2% month-on-month (up as much as 24.9% before seasonal adjustment), and 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 CPI month-on-month increase.
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Excluding food and energy, core CPI rose only 0.2% month-on-month, below market expectations of 0.3%, providing brief comfort to the market. However, economists generally warn that core inflation has not fully digested the secondary transmission effects of this energy shock—high-priced jet fuel will push up airfares, with Delta Air Lines already issuing a price increase warning; rising diesel costs will be passed on to road transportation, thus increasing the prices of various consumer goods; and higher fertilizer prices are expected to eventually lead to rising grocery bills.
Meanwhile, the broad-based tariffs implemented by the Trump administration continue to be passed on to consumers, further weakening the disinflationary trend and partially offsetting the deflationary trend in rents.
<h2>China's PPI Turns Positive, Imported Inflation Signal Cannot Be Ignored</h2>
While the market's attention is focused on the Middle East, reflationary signals from China are quietly accumulating. China's March PPI rose 0.5% year-on-year, a significant jump from the previous -0.9% and the highest level since 2022.
Market analysts point out that the trend of China's input prices has a strong leading indicator significance for US CPI, and China's input prices are currently rising sharply.
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Looking at historical patterns, the accumulation of price pressure in China often transmits to the US consumer end after several months, meaning that even setting aside the energy shock, China's reflation trend itself is sufficient to provide upward momentum for US inflation.
Shenwan Research's structural analysis of China's PPI further reveals that this round of price increases is not solely driven by crude oil. China's PPI rose 1% month-on-month in March. International oil prices rose 21.9% month-on-month, driving up PPI in related industries such as domestic oil and gas extraction.
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Simultaneously, the sharp short-term rise in oil prices directly impacts downstream and midstream petrochemical production, and the contraction of supply in the midstream and downstream has magnified the price increase—prices in industries such as petroleum processing (+5.8% month-on-month), chemical raw materials (+3.6%), and chemical fibers (+3.4%) all exceeded historical transmission experience. Shenwan estimates that the combined effect of crude oil and midstream/downstream supply contraction contributed 0.7 percentage points to the month-on-month PPI increase, making it the largest contributing factor.
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In terms of non-ferrous metals, although copper prices fell 3.1% month-on-month, prices of other non-ferrous metals such as rare earths (+11.8% month-on-month) and aluminum smelting (+0.7%) rose significantly, driving up PPI in non-ferrous metal mining and processing by 5.4% month-on-month and in non-ferrous metal rolling by 1%, adding about 0.1 percentage points to the month-on-month PPI increase. Price increases in coal and steel were relatively limited, contributing almost zero to the month-on-month PPI.
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<h2>Q2 PPI May Continue to Surge, Backwardation in Futures and Spot Markets Conceals Hidden Risks</h2>
Shenwan Research points out that the current backwardation between crude oil futures and spot prices means that China's PPI may surge significantly in the second quarter. Crude oil futures prices have fallen back to around $100 to $110, reflecting a slight adjustment in market expectations for oil prices, but spot prices remain high at around $130.
Shenwan estimates that if spot crude oil prices remain above $110/barrel through May, China's PPI year-on-year may further rise to around 2.0% in April and May.
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Regarding CPI, the surge in oil prices will be transmitted to the consumer end through two main channels: &#34;oil prices—refined oil CPI&#34; and &#34;PPI—core commodity CPI.&#34; It is expected that China's CPI year-on-year will rise again in the second quarter, with the center likely around 1.3%.
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The implications of this transmission path for US inflation should not be underestimated. Analysis suggests that the two price pressures from China and energy will intertwine and reinforce each other in the coming months, creating a compounding effect.
<h2>Fed's Dilemma, Real Interest Rates Under Pressure</h2>
Facing dual inflationary pressures, the Fed's policy space is being further compressed. The Fed's March meeting minutes show that an increasing number of policymakers are leaning towards the view that rate hikes may need to be reconsidered, and some economists already believe the possibility of rate cuts this year is extremely low.
However, the Fed's options in dealing with this situation are very limited. Real interest rates are facing significant downward pressure—market expectations for real interest rates in the next year have dropped significantly from 75-100 basis points pre-conflict to about 25-50 basis points. The decline in real interest rates itself will further fuel inflation expectations, and long-term yields will find it difficult to ignore this for long.
The pricing changes in the CPI fixed-rate swap market confirm this judgment: One-year inflation expectations have risen above 3%, while at the initial stage of the Middle East conflict, far-end swap pricing was similar to pre-war levels. The market's expectation for the persistence of inflation shocks has fundamentally shifted.
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Despite this, some economists believe the window for rate cuts has not completely closed. If labor market conditions deteriorate, there is still room for policy adjustments. However, the current inflation trajectory has significantly narrowed the Fed's room for maneuver between balancing price stability and economic growth, and imported inflation pressure from China is becoming a variable that cannot be ignored in this inflation game.

CRAK

Two forces are simultaneously transmitting to US inflation: first, the secondary effects of the "oil price shock" have not been fully digested; second, there is a systemic rebound in China's industrial prices. Historical data indicates that imported price pressure from China has a significant leading effect on US CPI. Shenwan Research believes that if spot crude oil prices remain above $110/barrel through May, China's PPI year-on-year may further surge to around 2.0% in April and May

- The March CPI data in the U.S. rose unexpectedly by 3.3% year-on-year, primarily driven by soaring energy prices, especially gasoline, which saw the largest monthly increase since 1967.  
- Meanwhile, China's PPI surged to 0.5%, signaling potential inflationary pressures that may influence U.S. inflation due to historically strong ties between the two economies.  
- The Federal Reserve faces challenges in addressing this dual inflation pressure, limiting its options for maintaining economic growth while controlling rising prices.

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Is US Inflationary Pressure Just Beginning? "Oil Price Shock" is Only Immediate, China's PPI Has Turned Positive