The rise in oil prices caused by the Iran conflict has finally reflected in our economic data. Today, the March PPI data was released, showing a year-on-year increase of 0.5%, marking the first positive change in over three years! The CPI, on the other hand, rose modestly by 1% year-on-year, with a slight decline month-on-month. The actual price increases in commodities are not limited to crude oil but also include non-ferrous metals and gold. The upward movement of commodity prices driven by PPI increases represents import-driven inflation for our country, which is different from demand-pull inflation during economic growth, and it will exert pressure on the economy.

The most direct impact is eroding manufacturing profits, especially if raw material costs are rising while retail prices cannot keep up. Of course, whether such a 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 push demand-side inflation. If demand-driven inflation can translate into increased income, then inflation could 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—price cuts, demand decline, and further price cuts. 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 to accommodate moderate inflation, there is still space for monetary policy adjustments. Even with the pressure from rising oil prices on the Federal Reserve, expectations for rate cuts have diminished. Additionally, the RMB to USD exchange rate is currently near its recent central position, and compared to two years ago, the central bank is more flexible.

Of course, the fundamental factor remains the healthy recovery of demand. If cost-push inflation cannot be transformed into demand-driven growth, it will be detrimental to both the economy and the stock market. However, from the current perspective, there is still reason to be optimistic.