The rise in oil prices caused by the Iran conflict has finally reflected in our economic data. Today’s March PPI data shows a year-on-year increase of 0.5%, marking the first positive reading in over three years! CPI is slightly milder, rising 1% year-on-year, with a slight decline month-on-month. The actual price increases in bulk commodities include not only crude oil but also non-ferrous metals such as gold. The upward push in PPI driven by rising commodity prices is an imported inflation for our country, different from demand-driven inflation during economic growth, and will put pressure on the economy.

The most direct impact is eroding manufacturing profits; if raw material costs are rising on one side, but retail prices cannot increase on the other, of course, whether this situation will occur is still uncertain. But in the short term, I personally believe this may not necessarily be bearish.

First, cost-push inflation could also force demand-side inflation; if demand-driven inflation can translate into increased income, then inflation will turn into a healthy cycle for the economy.

Second, our country has been plagued by deflation (or pressure?) in recent years. Even cost-push inflation can temporarily break the previous negative cycle of price cuts, demand decline, and further price drops. Moreover, compared to other countries that have suffered from inflation in recent years, the current price increases pose much less pressure on us.

Third, since the current levels of PPI and CPI still have room for moderate inflation, monetary policy also has room to maneuver. Even with the pressure on the Federal Reserve caused by rising oil prices, expectations for rate cuts have decreased. Additionally, the RMB to USD exchange rate is currently near its central position in recent years, and compared to two years ago, the central bank is more flexible.

Of course, everything ultimately depends on a healthy demand recovery. If cost-push inflation cannot be transformed into demand-driven growth, it will be unfavorable for both the economy and the stock market. But for now, there is still reason to be optimistic.