Pakistan’s return to double-digit inflation is increasingly being linked to higher fuel taxes, with new research suggesting that the government’s growing reliance on petroleum levies has become one of the biggest drivers of rising prices across the economy.
A report released by the Policy Research and Advisory Council (PRAC) states that the petroleum levy has evolved from a price stabilization mechanism into a significant revenue-generating tool. According to the study, repeated increases in fuel taxes have pushed up transportation and production costs, contributing substantially to inflationary pressures across multiple sectors.
The report notes that Pakistan’s inflation rate accelerated from 7.3 percent in March to 10.9 percent in April before reaching 11.7 percent in May. During the same period, the petroleum levy on petrol climbed sharply to Rs. 117.4 per litre. Researchers observed that consumers were unable to fully benefit from lower international oil prices as higher fuel taxes offset the impact of declining global crude prices.
Transport and energy-related expenses emerged as the largest contributors to inflation. Transport inflation surged by 36.8 percent year-on-year in May, while housing, electricity, gas, and fuel costs increased by 16.8 percent. Combined, these categories contributed nearly six percentage points to the overall inflation rate, accounting for more than half of Pakistan’s headline inflation during the month.
According to the report, diesel prices are having an even broader impact on the economy than petrol prices due to diesel’s extensive use in freight transportation, agriculture, industrial operations, and public transport. After temporarily removing the diesel levy in April amid rising international oil prices, the government reinstated the tax in May and increased it five times within just 29 days. As a result, the levy rose from Rs. 28.7 per litre to Rs. 68.9 per litre by the end of the month.
Researchers warned that higher diesel costs eventually filter through supply chains, increasing the prices of food items, consumer goods, agricultural products, and industrial outputs. The report argues that these indirect effects make diesel taxation a particularly powerful driver of inflation throughout the economy.
The study also highlighted an unusual development in Pakistan’s fuel market. Historically, diesel has traded at a significant discount to petrol because of its importance to commercial transport and agriculture. However, by the end of May, petrol and diesel prices had nearly converged at around Rs. 381 per litre. Researchers attributed this trend to the growing influence of taxation on fuel pricing rather than movements in international crude oil markets.
PRAC argues that the current inflation cycle is largely “cost-push” in nature, meaning it is being driven by government-administered prices, petroleum levies, and utility tariff adjustments rather than strong consumer demand. As a result, the report suggests that higher interest rates alone are unlikely to address the root causes of inflation because monetary policy cannot directly reduce fuel taxes or government-imposed charges.
The report also criticized what it described as a policy mismatch between fiscal and monetary authorities. While the government continues to increase petroleum levies to boost revenue collection, the State Bank of Pakistan responds to rising inflation by tightening monetary policy and raising borrowing costs. Researchers argue that this combination increases financial pressure on businesses, discourages investment and economic activity without effectively tackling the underlying drivers of inflation.
The findings come at a time when inflation has once again emerged as a major economic concern after falling to just 0.3 percent in April 2025. The report warns that unless policymakers distinguish between demand-driven inflation and fuel levy-driven price increases, businesses and consumers could continue facing rising costs even during periods of stable or declining global oil prices. Researchers conclude that addressing the role of petroleum levies in fuel pricing will be essential for controlling inflation and easing the cost-of-living burden on Pakistani households.
