Fuel price hike may push back the consumption story amid higher inflation: Business Standard May 15th 2026

 It was expected that the government would finally raise the prices of petrol and diesel. The questions were when and by how much. Now that there has been a Rs 3 per litre increase announced, the next question is whether this is the be all and end all, or will there be further hikes. On the face of it, there could be more coming as this will only partly address the under recovery challenge for oil marketing companies (OMCs). What does this mean for the economy?

 

The evident apprehension is on inflation, which will be impacted. LPG price were hiked to begin with after which came ATF. More recently the CNG price was increased, and now retail prices of petrol and diesel. The last two have a weight of nearly 5 per cent in the CPI and it is easy to gauge the initial impact.

But there would be secondary and tertiary effects. Transport costs such as taxi and auto fares as well as trucking would increase. This is something that needs to be watched as it has wider ramifications. The tertiary effects will be seen when transport costs go up as most commodities use these services. This will push up the input costs of production and possibly raise the question to corporates on whether there should be a fresh round of price increases.  

Companies in the chemicals sector, real estate, glass ceramics etc. have already announced increase in prices. This can become wider given the spike in fuel prices. We have already seen the WPI witnessing an increase of over 8 per cent in April, which reflected the impact of higher crude prices. Now it will manifest in retail prices too. 

Higher inflation can come in the way of the consumption story that was to play out this year. Lower inflation coupled with GST cuts and income tax rationalization helped to boost consumption in fiscal 2025-26 (FY26). Things will change this year and consumption can be pushed back with higher inflation. It looks likely that inflation will cross the 5 per cent mark for sure even if we disregard the El Nino effect. Therefore this will be a concern especially for consumer durables and FMCG companies. 

Slowdown in consumption will come in the way of private investment, which can now turn further cautious on taking such decisions. 

More importantly, the monetary policy committee (MPC) can no longer ignore the inflation impact, and hence it looks more or less certain that there cannot be any further rate cuts. There is only a case of rates going up and the future discussion will be on when and the quantum of rate hikes. 

 

Presently with inflation for April being benign at 3.5 per cent, the June policy can look through it. But the speed with which these numbers can rise will be important. WPI had leaped from 3.9 per cent to 8.3 per cent in a month’s time. While the quantum of increase may not be this sharp, the May number will reflect the primary effect  for sure (with even gold becoming dearer and getting reflected in the personal care group). 

Quite clearly the oil shock of 2026 will have a deeper impact on inflation across the world. We will not be insulated as higher inflation can finally also affect growth indirectly. This is something that requires closer monitoring.