Headline CPI inflation rose 7.3 percent year-on-year in March, the highest since August 2024. The spike was widely anticipated, as a low base coupled with swings in energy prices headlined March. This is the first time since October 2025 that month-on-month inflation has surpassed 1 percent in both urban and rural settings.
As food inflation takes a backseat, the divergence between urban and rural settings also narrows from recent episodes of high inflationary rounds, the last of which was dominated by the wheat fiasco in October 2025.
Nearly two-thirds of the overall month-on-month increase is attributed to a significant increase in the transport sub-index, with motor fuel and transport services leading the change.
Electricity tariffs accounted for a fifth of all month-on-month change in both urban and rural settings. The average national domestic tariff is now back up to Rs28.36 per unit, the highest in 20 months, despite a round of base tariff reduction. The upward adjustment in lieu of fixed charges on domestic consumption was the main contributor in February, though doubts remain on the accurate treatment of the impact. Higher quarterly and monthly adjustments for March took it further up. Though still down from the peak, the trajectory since the beginning of FY26 has been upward, and national average domestic tariffs could soon be closing the gap with the 2024 highs.
As the supply of LNG stays out of the window in the near future, even if the war were to end tomorrow, considerable upward pressure on electricity tariffs is imminent, as the system will invariably have to rely on costlier fuel to keep pace with summer demand. The last few months have already seen positive monthly fuel charges adjustments, and more of the same is in store for the last quarter, and possibly beyond.
The higher relative basket weight of liquefied hydrocarbons (LPG) in rural settings meant electricity and LPG combined contributed one-third of all month-on-month increase. The high month-on-month reading comes despite negative month-on-month food inflation in rural areas and stagnant readings in urban settings. This is a very rare occurrence of negative month-on-month food inflation, failing to keep overall month-on-month inflation from going past 1 percent.
Core inflation, all this while, has remained stubborn. It held at 7.2 percent year-on-year in urban areas and 8.3 percent in rural areas, showing little sign of easing. For FY26, it is premature to make definitive calls, but if inflation lands anywhere within the State Bank’s 5–7 percent target range, it would mark the first time since CPI rebasing that annual inflation stays in single digits, despite multiple month-on-month readings above 2.5 percent.
And then the elephant in the room that now awaits everyone. It is the pass-through of fuel prices that the government has so far resisted, and in the process burned close to Rs100 billion in just a month. The impact waiting to be passed on stands to alter CPI readings in substantial ways, as both petrol and HSD continue to be heavily subsidized. The fiscal pressures arising due to the non-passing will not be trivial and will likely reflect toward the end of the fiscal year, in one way or another, in the form of higher taxes elsewhere, more money printing, or possible currency depreciation resulting from heightened chances of the all-familiar twin deficits.
What cannot be missed is the sharp spike in the wholesale price index, which jumped 5.9 percent month-on-month, the steepest increase in over three years. The bulk of the increase is owed to a significant rise in fuel prices, from diesel to gasoline and from kerosene to LNG. The transmission from WPI to retail, especially when led by transport fuel, happens almost instantaneously, and early signs could well be seen in the upcoming weekly price movements.
The central bank, in its previous policy statement, had warned of these risks. With the war entering its second month, the risks are already playing out. Fiscal slippages have begun, and with likely upward administered price adjustments imminent, a course correction in the interest rate stance is a foregone conclusion. It is now a matter of how much, not if.