How fuel price hikes could impact inflation and your daily expenses; expert warns food, transport costs may rise

After a gap of more than four years, fuel prices were raised across India on Friday, with petrol and diesel becoming costlier by ₹3 per litre and CNG prices increasing by ₹2 per kg in Delhi and Mumbai.

The fuel price hikes are aimed at offsetting losses caused by soaring crude oil prices. However, the bigger concern now is their cascading impact on retail inflation in the coming months.

“Given the losses being incurred by oil marketing companies (OMCs), a rise in petrol and diesel prices was inevitable,” Madan Sabnavis, Chief Economist, Bank of Baroda, said.

What remains unclear, however, is whether this is a one-time increase or the beginning of a series of hikes. “My assumption is that there could be another round of increases, as a ₹3 per litre hike may not be sufficient to fully offset the losses faced by OMCs,” he said.

Global oil prices surged past $120 a barrel after the Strait of Hormuz was severely disrupted and partially shut following the conflict triggered by the U.S.-Israeli attacks on Iran. Prices later eased, retreating to the $100–$105 per barrel range. Before the conflict in West Asia, crude oil was trading below $75 per barrel, indicating a more than 50% jump in just three months.

India is among the last major economies to raise retail fuel prices.

How will the fuel price hike impact retail inflation?

The direct impact of the fuel price hike would be muted at about 15 basis points on consumer price inflation, although the indirect impact will be larger, Madhavi Arora, chief economist at Mumbai-based Emkay Financial Services, told Reuters.

Elaborating on it further, Sabnavis said, “From an inflation perspective, the impact is significant. Petrol and diesel together account for nearly 5% of the Consumer Price Index (CPI). A ₹3 increase roughly translates into a 3% rise in fuel prices, which alone could have a direct impact of around 0.15% on inflation. To this, we must also add the effects of the earlier hikes in LPG and CNG prices. So, there will certainly be upward pressure on inflation.”

But this is only the primary impact.

“The secondary effects could be much broader. Higher CNG prices typically lead to higher auto fares, while higher diesel prices raise transportation costs. As transportation costs rise, the impact filters through multiple sectors of the economy, including agriculture. This, in turn, can push up food prices as well.”

Which sector will be most impacted?

The sectors likely to face the most immediate impact include agriculture, food, FMCG, steel, e-commerce and tourism, as rising fuel and transportation costs are expected to push up operating expenses

So, the way to assess the situation is to distinguish between the direct and indirect effects on inflation. The direct impact may be visible immediately in the index, but the indirect effects are likely to emerge gradually over the next couple of months.

How much could fuel price hikes push up retail inflation?

Even if 60% to 70% of the increase in fuel prices is passed on to consumers, the overall impact on inflation may not be very significant, said Sujan Hajra, Executive Director, Chief Economist at Anand Rathi Financial Services.

“Even if fuel inflation crosses 10%, headline CPI inflation is still likely to remain around 5%. Of course, the base effect could influence the overall inflation trajectory, but even after accounting for that, inflation is expected to stay broadly within the 4.5% to 5% range.”

Meanwhile, Emkay says, “We expect a ₹10/ltr fuel price hike in the immediate future – either in one shot or via creeping hikes over 2-3 weeks. This covers just ~50% of OMC under-recoveries, which are otherwise running at quarterly losses of Rs570-580bn.”

The hike could push inflation up by ~75bps (including second-order effects), causing a meaningful drag on consumption, it adds.