Amid supply chain disruptions stemming from the US-Israel conflict with Iran, economists expect limited impact on headline retail inflation in the near term. However, they warn that the impact will be felt promptly in wholesale inflation.
The recent surge in Brent crude prices has raised concerns about imported inflation in energy-importing economies like India.
Economists point out that the pass-through to the Consumer Price Index (CPI), the headline retail inflation measure, is likely to remain limited in the short term. The government has historically managed retail fuel prices (petrol and diesel) to shield consumers, often through excise duty adjustments, subsidies, or delayed pass-through. Recent examples include the controlled response during the Russia-Ukraine war. Wholesale prices, however, will bear the brunt of escalating oil prices, with the impact potentially visible in March–April data, economists said.
WPI more sensitive to global commodity prices than CPI: Economist
“The Wholesale Price Index (WPI) is more impacted by external global commodity prices and other external factors. CPI has a large share of services, which are mostly domestic. The imported component in CPI is very low because it mainly captures mass-market products,” said Gaura Sengupta, Chief Economist at IDFC First Bank. Gupta further noted that the combined share of crude, petroleum kerosene, natural gas, LPG, diesel, etc., in WPI is around 8.26%, while fuel and power together account for 15.6%.
Madan Sabnavis, Chief Economist at Bank of Baroda, anticipates an additional 150 basis points jump in WPI if there is a permanent increase in all fuel prices. “The rule of thumb for WPI is that a 10% increase in fuel will lead to a 1% increase in the index,” he said. He added that indirect impacts on other products could contribute another 50 basis points, resulting in an overall increase of 1.5 percentage points.
Sengupta explained that rising fuel costs will affect production costs across sectors. “Higher energy/input costs raise manufacturing prices. Manufacturing has a large share in WPI, around 64% overall (food 9%, non-food manufacturing 55%),” she said. Sabnavis highlighted two main channels of imported inflation: “One is the direct impact when prices of imports go up—that is, when commodity prices rise. The second is the costs associated with all imports: logistics costs, shipping costs, insurance, and so on. These will also rise.”
Economists noted that the share of imported products in the CPI basket is limited, with fuel items carrying a weight of 6.84%. “The direct impact on CPI is through petrol and diesel prices, but fiscal policy can mitigate much of that impact,” said Sakshi Gupta, Principal Economist at HDFC Bank. “A sustained elevation in oil prices could add only 20–30 basis points to headline CPI over FY27.”
LPG hike to add modest inflation pressure, says economist
Sengupta added that the recent LPG price hike (around 7%) is expected to contribute about 14 basis points to retail inflation from March onwards. India’s strong economic momentum and fiscal tools provide resilience, but prolonged disruptions could strain the current account, fiscal balance, and growth more than immediate inflation.
Vivek Kumar, Economist at QuantEco, said that if crude prices stay over $90 per barrel next financial year, the government will have to pass on the burden to retail consumers as well. “If they don’t do it, then the fiscal situation blows up,” Kumar said.
The ongoing US-Israel conflict with Iran has triggered significant volatility in global energy markets. Brent crude prices surged sharply above $119 per barrel on Monday amid fears of disruptions through the Strait of Hormuz. Brent crude prices fell to $93.32 per barrel on Tuesday, 5.70% down from Monday.