KARACHI:

Pakistan’s hard-won respite from chronic inflation, despite internal political disorder, appears to be slipping as an external global oil price shock, triggered by the ongoing Israel-US aggression towards Iran, begins to transmit into the domestic economy, prompting analysts to warn of a return to double-digit inflation from April.

“The National Consumer Price Index (NCPI) is set to enter double digits from Apr-26, driven by 1) base effect, 2) spike in oil prices, 3) lagged fuel cost spillovers to other sectors, and 4) potential negative economic impact as the geopolitical situation prolongs,” noted Maaz Azam, Research Head of Optimus Capital, in his report. Continued government fuel subsidies may pressure fiscal and current account balances amid already tight fiscal space and high debt, and accordingly, yields are already up around 100–200 bps across tenors.

“Our projection for April inflation is around 9.9%, which is close to 10%,” said Sana Tawfiq, Head of Research at Arif Habib Limited (AHL).

The spillover effects of the Gulf War are not limited to Pakistan but are affecting the whole world.

The conflict in the Middle East could lower economic growth in developing Asia and the Pacific by up to 1.3 percentage points over 2026-2027 and raise inflation by 3.2 percentage points if energy market disruptions last more than a year, according to new research by the Asian Development Bank (ADB).

While some narratives suggest an immediate return to double-digit inflation, that is not the case—it is more likely from next month. For March, we expect inflation to come in at around 7.6%, she explained.

The energy shock is already feeding into broader inflation through higher logistics costs, electricity tariffs, and industrial input prices. Analysts caution that the lagged impact of fuel price adjustments will likely push inflation into double digits in the coming months.

The State Bank of Pakistan (SBP), in its last Monetary Policy Committee (MPC) meeting, kept the policy rate unchanged at 10.5%, citing an inflation outlook broadly in line with earlier projections. However, the upcoming MPC meeting scheduled for April 27, 2026, is now seen as critical.

Latest estimates suggest that the NCPI rose by around 1.2–1.3% month-on-month in March 2026, largely driven by a steep increase in fuel costs and higher electricity tariffs. On a yearly basis, inflation is projected at 7.4% in March, but this is expected to accelerate significantly in the coming months due to base effects and persistent cost pressures, Azam highlighted.

The primary driver behind the shift is a surge in global oil prices, which has begun to translate into domestic fuel adjustments. International benchmarks have risen sharply, with refined petroleum products such as gasoline and diesel recording substantial gains. Although the government has absorbed part of the increase through subsidies, domestic fuel prices still climbed by roughly 25% on average during March.

This has had a cascading impact on transport costs, a key component of the inflation basket, he stated. The transport index is estimated to have jumped by over 13% on a monthly basis and more than 14% year-on-year, making it one of the largest contributors to the overall price increase. Analysts estimate that fuel and transport alone accounted for nearly two-thirds of the monthly rise in inflation.

Electricity prices have also added to the pressure. A fuel cost adjustment (FCA) of Rs1.63 per unit, extended to include previously exempt protected consumers, pushed the electricity index higher during the month. Power tariffs are estimated to have risen by around 5% month-on-month and 15% on an annual basis, further amplifying household cost burdens.

Together, energy-related components, fuel, transport, and electricity, have shifted the composition of inflation away from food and towards cost-push factors.

The external account is also at risk. Higher oil prices could increase Pakistan’s import bill, putting pressure on the current account and foreign exchange reserves, especially at a time when the country is navigating a delicate macroeconomic recovery.

“Prolonged uncertainty without near-term resolution could lead to monetary tightening,” Muhammad Waqas Ghani, Head of Research at JS Research, said, highlighting the risk that persistent external shocks may force the central bank to reassess its stance.