Pakistan’s return to double-digit inflation is being increasingly linked to the government’s growing reliance on the petroleum levy, with new research suggesting that higher fuel taxes, rather than excess consumer demand, have become one of the biggest drivers of rising prices across the economy.
A report released by the Policy Research and Advisory Council (PRAC) argues that the petroleum levy has evolved from a price stabilization tool into a major revenue-generating instrument. The study contends that repeated increases in the levy have raised fuel costs, pushed up transportation and production expenses, and contributed significantly to the recent surge in inflation.
According to the report, inflation accelerated from 7.3 percent in March to 10.9 percent in April and 11.7 percent in May, coinciding with a sharp rise in the petroleum levy on petrol, which reached Rs. 117.4 per litre in May. Researchers noted that the increase occurred despite periods when international oil prices were easing, preventing consumers from fully benefiting from lower global crude prices.
The report highlights transport and energy-related costs as the primary sources of inflationary pressure. Transport inflation climbed to 36.8 percent year on year in May, while housing, electricity, gas, and fuel costs rose 16.8 percent. Together, these two categories contributed roughly 6 percentage points to the overall inflation rate of 11.7 percent, accounting for more than half of headline inflation.
Researchers argue that diesel prices are having an even greater impact on the economy than petrol. Diesel is widely used in freight transport, agriculture, industrial operations, and public transportation.
After the government temporarily removed the diesel levy in April when international prices surged, it reintroduced the tax in May and raised it five times within 29 days, taking it from Rs. 28.7 per litre to Rs. 68.9 per litre by month end. The report warns that higher diesel costs eventually flow through supply chains and increase the prices of food, consumer goods, and industrial products.
The study also points to an unusual trend in fuel pricing. Historically, diesel has traded at a meaningful discount to petrol because of its importance to agriculture and commercial transport. By the end of May, however, petrol and diesel prices had almost converged at around Rs. 381 per litre, reflecting the growing impact of taxation on fuel prices rather than movements in international crude markets.
PRAC further argues that the current inflation cycle is largely “cost push” in nature, meaning it is being driven by administered prices, fuel levies, and utility tariff adjustments rather than strong consumer demand. As a result, the report says higher interest rates are unlikely to address the underlying cause of inflation because monetary policy cannot directly reduce fuel taxes or government-imposed charges.
The report criticizes what it describes as a policy mismatch between fiscal and monetary authorities. While the government raises petroleum levies to generate revenue, the State Bank of Pakistan responds to higher inflation by increasing interest rates. According to the researchers, this combination raises borrowing costs for businesses, discourages investment, and slows economic activity without addressing the root cause of inflation.
The findings come at a time when inflation has reemerged as a major economic concern after falling to just 0.3 percent in April 2025. Researchers warn that unless policymakers distinguish between demand-driven inflation and fuel levy-driven price increases, businesses and consumers could continue to face rising costs, even during periods of relatively stable or declining global oil prices.
no brainer article.