The persistence of elevated oil prices may exceed expectations, potentially driving up global inflation while simultaneously hindering worldwide economic growth. On February 28, 2026, a sudden joint military action by the United States and Israel against Iran intensified tensions in the Middle East. This conflict shows signs of escalating and becoming protracted, damaging oil infrastructure in Middle Eastern producer nations and reducing their production capacity. Concurrently, Iran has effectively blockaded the Strait of Hormuz, constricting a major global energy artery and disrupting international shipping.
Consequently, on March 9, the price of Brent crude oil surpassed $100 per barrel for the first time in over three years. After a brief pullback, prices exceeded $100 again starting March 12, closing at $117.08 per barrel on March 20. For the period up to March 20, the average crude oil price increased by 34.7% year-over-year, ending a 19-month streak of negative growth.
As the lifeblood of the modern economy, high oil prices elevate costs for transportation, industrial production, and household living expenses, leading to broad-based price increases and casting a shadow over global inflation and economic growth. Analysis from China's National Bureau of Statistics indicates that by February 2026, the year-on-year decline in China's Producer Price Index had narrowed for three consecutive months, while the month-on-month figure had seen positive growth for five straight months, partly attributable to rising international energy and non-ferrous metal prices.
Tensions in the Middle East, high energy prices, and disrupted international logistics could increase imported inflationary pressures for China. However, given that China's inflation has been running at low levels for an extended period, this situation might actually assist in achieving a reasonable rebound in price levels. Japan serves as a pertinent example. Simultaneously, close attention must be paid to potential challenges from a possible global demand contraction and energy market volatility stemming from an escalation of the US-Iran conflict, which could impact China's economic and financial stability, necessitating preparedness for both scenarios.
Japan's economy experienced long-term stagnation following the collapse of its asset bubble. Despite the Bank of Japan implementing quantitative and qualitative easing in 2013 and negative interest rates in 2016, the country struggled to escape deflation. From April 2015 to March 2022, Japan's core Consumer Price Index showed negative year-on-year changes for 18 months and was between 0% and 1% for 58 months. It was not until global supply chain disruptions from the pandemic in 2020 and rising international commodity prices due to the Russia-Ukraine conflict in 2022 created sustained imported inflation that Japan's chronic deflation was alleviated.
From April 2021 to September 2023, Japan's PPI inflation rose above 2%, subsequently pushing CPI inflation above the 2% target for 45 consecutive months starting in April 2022. When Japan's inflation initially surged, major global central banks, led by the U.S. Federal Reserve, were aggressively tightening policy. However, the Bank of Japan waited until it observed a rise in domestic inflation expectations and confirmation of a wage-price spiral before cautiously raising its policy target rate by 20 basis points to 0.1% in March 2024, exiting the negative interest rate era. It subsequently raised rates by 15 basis points in August 2025, and by 25 basis points each in January and December 2026, while gradually reducing bond purchases to steadily normalize monetary policy.
This reflation reset the Japanese economy, yielding several positive outcomes: First, it improved the quality of economic growth. From 2022 to 2025, Japan's real GDP grew at an average annual rate of 0.75%, while nominal GDP grew at 3.72% annually. In contrast, from 2013 to 2019, real GDP averaged 0.74% growth, but nominal GDP grew only 1.42% annually. Second, it alleviated the overall societal debt burden. From Q2 2022 to Q2 2025, Japan's non-financial sector leverage ratio decreased by 39.8 percentage points cumulatively. Third, it boosted asset prices. From 2022 to 2025, Japanese stock markets rallied despite the yen hitting multi-decade lows, with the Nikkei 225 index reaching record highs, cumulatively rising 75%.
A year before Japan's CPI met its target in 2021, China's average annual CPI inflation was 0.9%, with PPI at 8.1%, compared to Japan's figures of -0.3% and 4.6%, respectively. This indicated a stronger foundation for reflation in China. While global inflation returned from 2021 onward, and Japan experienced reflation starting in 2022, China missed this opportunity.
Both China and Japan rely on commodity imports, but to different degrees. Japan, resource-poor, has import dependencies nearing 100% for crude oil, iron ore, copper, and aluminum, compared to China's 65%-85%. Japan's coal import dependency is 82%-90%, while China's is only 5.7%. Correlation analysis from January 2018 to February 2026 shows a moderate positive correlation of 0.718 between China's PPI inflation and international commodity price inflation, whereas Japan shows a strong positive correlation of 0.813, indicating a more pronounced imported inflation effect for Japan due to higher import reliance.
In 2021 and 2022, facing volatile international commodity prices, high global inflation, and domestic pandemic disruptions, the Chinese government implemented measures to ensure supply and stabilize prices. These included market-based reforms for coal-fired power pricing, crackdowns on hoarding and speculation, and enhanced supervision of commodity futures and spot markets. These actions were effective. During the period of high international prices, domestic price increases for coal, copper, and aluminum in China were significantly smaller than international surges, and subsequent price declines were also more muted domestically. This dampened the transmission of imported inflation to China.
From February 2021 to February 2023, the correlation between Japan's PPI and international commodity prices remained strongly positive, though slightly decreased. In contrast, China's correlation shifted from strongly positive to essentially non-existent. Since October 2022, China's PPI turned negative, leading the downturn in international commodity prices by five months, and remained negative for 41 consecutive months up to February 2026. Furthermore, during the pandemic, China's policies focused on stabilizing market entities, which preserved supply but exacerbated oversupply across industrial chains. The correlation between PPI and CPI in China was weakly negative during the high inflation period for Japan, turning to a weak positive later, but persistently negative PPI continued to drag down CPI.
As the US-Iran conflict escalates, global energy market turbulence intensifies, with potential impacts extending beyond the conflict period. Recent analysis suggests that physical destruction of oil infrastructure in Iran and the Persian Gulf, which could take years to repair, is the critical factor determining whether future oil prices stabilize around $70 or soar above $110 per barrel. The IMF has noted that a 10% increase in energy prices sustained for one year could raise global inflation by 0.4 percentage points and slow economic growth by 0.1-0.2 percentage points. Simulations indicate that oil prices averaging $140 per barrel for two months could push the eurozone, UK, and Japan into mild contraction and bring the US close to recession, whereas prices at $100 per barrel would slow global growth but likely avoid recession.
Thus, sustained high oil prices present both opportunities and challenges for China's inflation trajectory. On one hand, they increase imported inflation pressure, potentially accelerating price rebounds and aiding reflation. Some forecasts suggest China's PPI could turn positive by April 2026, with the annual PPI and GDP deflator also potentially turning positive. On the other hand, they could suppress external demand for Chinese products, exacerbating domestic oversupply relative to demand, and potentially hindering the price recovery.
Facing this complex external environment, a certain tolerance for price increases is warranted. The Central Economic Work Conference at the end of 2025 proposed continuing moderately easy monetary policy, explicitly citing the promotion of stable economic growth and a reasonable rebound in prices as key considerations. This signals that supportive policies may remain even if growth targets are met, as long as inflation objectives are not. Similar to the Bank of Japan's approach, which waited for confirmation of a demand-pull inflation spiral before fully exiting stimulus, the People's Bank of China might also need to wait for clear signs of demand-driven inflation before considering policy normalization, especially in a cost-push inflation context.
In 2021 and 2022, China's average PPI inflation was 8.1% and 4.2% respectively, but CPI inflation was only 0.9% and 2.0%, still below the approximate 3% target. Following the principle of "not making sharp turns" in macro policy, the PBOC did not tighten but instead continued to cut reserve requirements and interest rates. This caution proved justified, as PPI remained negative from 2023 to 2025, and CPI fell to levels slightly above zero. Currently, preparedness for both scenarios is necessary. If the Middle East situation worsens, causing a global slowdown or recession, monetary policy must coordinate closely with fiscal policy. Budgetary arrangements at the year's beginning have enhanced fiscal sustainability and reserved policy space for contingencies.
Deepening external influences necessitate using the stability of the domestic cycle to hedge against international uncertainty. Efforts should focus on building a strong domestic market, problem-solving, and reinforcing reforms alongside macro policies to remove economic bottlenecks and convert policy effects into endogenous growth momentum. Key measures include implementing urban and rural income growth plans to stimulate consumer spending, improving service consumption, removing unreasonable consumption restrictions, fostering new consumption growth points, promoting paid leave systems to boost leisure consumption, and directing investment towards new productive forces, urbanization, and human development. Enhancing effective investment led by market forces and increasing the proportion of government investment in民生 areas is also crucial.
Further advancing the development of a unified national market is essential to improve the transmission of PPI inflation to CPI. This involves standardizing local government economic promotion practices, regulating tax incentives and subsidies to reduce无效供给, using legal and market-based measures like capacity regulation and price执法 to curb "involutionary" competition, ensuring fair development for platform economies, and steadily reforming prices for public utilities and services to理顺price传导mechanisms. Temporary subsidies can compensate vulnerable groups affected by price changes, as was done from 2020 to 2022, benefiting 730 million person-times.
Finally, the uncertainty surrounding the US-Iran conflict and high oil price scenarios increase market volatility and policy expectation fluctuations among major central banks, recently causing turbulence in global stock, bond, currency, and commodity markets. These developments are spilling over into China's financial markets through channels like external demand, cross-border capital flows, and investor sentiment. Domestic stakeholders must closely monitor and assess the impact of these external shocks. Relevant authorities should dynamically完善policy tools to address imported risks, utilizing macroprudential and financial stability measures promptly to mitigate or block the transmission of external risks. Market entities within China should also enhance monitoring, quantify their external risk exposures, actively identify and manage risks, and完善contingency plans to be well-prepared.