Pakistan Braces for Double-Digit Inflation After Gulf Conflict Sends Oil Prices Surging

The digital display at a fuel station in Lahore flickered briefly before settling on a new price: 321 rupees for a liter of petrol, up 55 rupees from the night before.

For minibus driver Muhammad Imran, that meant an extra 2,200 rupees to fill his tank — more than a day’s profit on some routes.

“I have two choices,” he said, watching the meter climb. “Either I raise fares and lose passengers, or I keep the old fares and take the hit myself. In both cases, somebody is paying for this war.”

The war he was referring to is not in Pakistan, but in the Gulf. A spiraling conflict involving the United States, Israel and Iran has driven global oil prices sharply higher and disrupted shipping through the Strait of Hormuz and the Red Sea. Now, officials in Islamabad and private analysts say the shock is about to end Pakistan’s brief era of exceptionally low inflation and push consumer prices back into double digits.

In its Monthly Economic Update & Outlook – March 2026, released at the end of last month, the Finance Division projected that nationwide consumer price inflation for March would come in between 7.5% and 8.5% year over year. The report warned that “rising global oil prices and the evolving geopolitical situation in the Middle East” posed upside risks to domestic inflation by raising energy and transport costs.

Official data published days later by the Pakistan Bureau of Statistics showed headline inflation at 7.3% in March, up from 7% in February and far above the 0.7% recorded in March last year, when Pakistan briefly posted some of the lowest inflation readings in its history.

The Ministry of Finance stopped short of forecasting a return to double-digit inflation. But brokerage houses and research firms have been more blunt.

In a note to clients, Karachi-based Optimus Capital Management said it expects national CPI to “likely move into double digits from April 2026 onward,” citing a combination of the fuel shock, base effects from last year’s unusually low readings, and the lagged pass-through of higher transport and energy costs to the broader economy.

From 38% to near zero — and back up again

The warning marks a sharp turn in a story that, until recently, had been held up as a rare success.

Pakistan suffered one of the worst inflation crises in its modern history in 2022 and 2023, when a plunging currency, repeated hikes in electricity and gas tariffs, and global commodity shocks pushed annual inflation to nearly 38% in May 2023, according to official figures. Basic food items doubled in price in some cities; electricity bills climbed beyond the reach of many households.

Amid an International Monetary Fund program and aggressive monetary tightening, inflation then fell almost as dramatically. As global commodity prices eased, the rupee stabilized and earlier spikes fell out of the annual comparison, headline inflation dropped into single digits and then near zero.

In March 2025, consumer prices were just 0.7% higher than a year earlier. In April 2025, the rate slipped to around 0.3%, the lowest in six decades. For the first time in years, wages and pensions at least kept pace with prices, and some households saw a modest improvement in purchasing power.

Economists say those unusually low readings now have a flip side.

“Base effects alone would have pushed inflation up this spring even without an external shock,” said one Karachi-based economist at a local brokerage. “When you compare today’s prices to a period of almost zero inflation, the year-on-year numbers will jump. The oil shock is amplifying that.”

The Finance Division acknowledged this dynamic in its February 2026 update, noting that while inflation remained within the government’s target range, “recent developments in global commodity and energy markets” and the fading of the low base from 2025 were likely to put upward pressure on prices.

Oil war at sea, price pain at home

That pressure intensified in early March, after a series of attacks and military strikes around the Strait of Hormuz, a narrow waterway that carries about one-fifth of the world’s crude oil. Benchmark Brent crude futures, which had traded in the $70–$80 per barrel range earlier in the winter, spiked above $100, with news reports putting prices around $108 to $116 at various points.

Shipping routes in the Red Sea and Gulf were rerouted or slowed, raising freight and insurance costs. Pakistan, a net importer of petroleum products, felt the impact within weeks.

On March 7, the government announced what officials and local media described as the steepest one-time increase in fuel prices in the country’s history: petrol and high-speed diesel were each raised by 55 rupees per liter, roughly 20%. The move took petrol to about 321 rupees per liter and diesel to around 336 to 337 rupees.

Announcing the decision at a news conference in Islamabad, federal ministers linked the hike directly to the Gulf crisis, saying the government could not shield consumers from the full impact of soaring international prices.

A few days later, Pakistan’s petroleum secretary told a parliamentary committee that the cost of imported diesel had more than doubled, from about $88 to $187 per barrel, while petrol import prices had climbed from the mid-$70s to roughly $130. He said Pakistan held around 27 days of petrol stocks and 21 days of diesel, stressing the need to maintain adequate inventories during what he called an “uncertain and volatile” period for global energy markets.

The price shock quickly filtered into inflation calculations. Analysts at Optimus Capital estimate that fuel alone accounted for about two-thirds of the month-on-month increase in March’s CPI, with electricity charges also contributing significantly. They expect the energy sub-index of the inflation basket to have returned to double-digit annual growth — around 16% to 17% — for the first time in more than a year.

Austerity, the IMF and political limits

The timing of the shock is sensitive for the government of Prime Minister Shehbaz Sharif, which is operating under a multi-year Extended Fund Facility and a climate-focused Resilience and Sustainability Facility with the IMF.

Under those arrangements, Pakistan has pledged to rebuild foreign exchange reserves, narrow its budget deficit and overhaul its loss-making energy sector. The IMF has repeatedly urged authorities to move toward cost-recovery tariffs for electricity and gas and to avoid broad, untargeted subsidies on fuel.

The Finance Division has highlighted progress on those fronts. In its March economic update, it said Pakistan recorded a primary budget surplus — the balance before interest payments — of about 3.2% of gross domestic product in the first eight months of the current fiscal year. It credited higher tax collections and tighter spending controls, and said the government was “adhering to fiscal austerity” while trying to protect vulnerable groups through expanded social safety nets.

At the same time, political pressure over rising fuel and power bills is mounting. Following the March 7 increase, the petroleum minister and other officials suggested the government would try to “absorb” any further sharp jumps in international prices, signaling that they could cut fuel levies or dealer margins to limit future hikes at the pump.

Economists warn that such moves could put the budget and the IMF program under strain if global oil prices stay elevated.

“You can smooth prices for a month or two,” a senior analyst at a Karachi brokerage said. “But if you systematically underprice fuel, you lose revenue and you send the wrong signal to markets and to the IMF. The room for that is very limited given Pakistan’s debt and financing needs.”

The State Bank of Pakistan, which sets monetary policy, is also facing a difficult balancing act. Its Monetary Policy Committee left the benchmark interest rate unchanged at 10.5% at its March 9 meeting, despite the unfolding oil shock. In its statement, the committee cited “heightened uncertainty in global oil markets” and noted the rise in inflation to 5.8% in January and 7% in February, but said core inflation and medium-term expectations remained broadly anchored.

With inflation now expected to climb further, attention is turning to the central bank’s next policy meeting, scheduled for late April. A move back into double-digit CPI, if confirmed by the April data, would test the bank’s resolve to keep rates on hold.

Households and the road ahead

For ordinary Pakistanis, the debate over base effects and fiscal targets is secondary to the immediate hit to living costs.

Transport fares on intercity buses and urban minibuses have already risen in several provinces, according to local transport associations. Farmers’ groups say higher diesel prices are pushing up the cost of running tube wells and tractors, as well as transporting produce to markets. Small manufacturers reliant on diesel generators during power outages report thinner margins and, in some cases, cuts in shifts.

The government points to increases in cash transfers under the Benazir Income Support Programme and other schemes as evidence that it is cushioning the poorest. According to official data, disbursements under BISP in the first seven months of the fiscal year were roughly a third higher than a year earlier.

Even so, economists say the incidence of the current shock is regressive. Low-income and lower-middle-income households spend a larger share of their budgets on energy and transport, leaving them more exposed to price swings at the pump and in electricity bills.

The broader question now is whether the inflation surge will be sharp but brief, or whether it risks reopening deeper macroeconomic wounds.

If the Gulf conflict eases and oil prices retreat, some analysts expect Pakistan’s inflation rate to peak in the low double digits later this year before declining again, especially if monetary policy remains tight and the rupee stable. A prolonged war and sustained disruption to shipping, however, could force the government into a series of difficult choices: pass on more pain to consumers, cut other spending to protect the budget, or borrow more and risk renewed financial stress.

For drivers like Imran, those scenarios are far removed from the daily calculation at the fuel station.

“Last year prices were finally stable,” he said, climbing back into his minibus. “Now, with one decision, everything is more expensive again. We don’t know how long this will continue — we only know we have to keep driving.”