A new PRAC report says higher petroleum levy rates are pushing up transport, energy and production costs, making fuel taxes a major driver of inflation in Pakistan.
Petroleum Levy Becomes a Key Inflation Pressure
Pakistan’s return to double-digit inflation is being increasingly linked to rising fuel taxes, as a new report warns that the petroleum levy has become one of the strongest sources of price pressure across the economy.
The report by the Policy Research and Advisory Council (PRAC) argues that the petroleum levy, which was originally meant to work as a price stabilization tool, is now being used mainly as a revenue collection instrument. This means that when global oil prices ease, consumers do not always receive the full benefit because taxes on fuel are raised or maintained to protect government revenue.
According to the report, inflation rose from 7.3 percent in March to 10.9 percent in April and then 11.7 percent in May. The increase came during the same period when the petroleum levy on petrol reached Rs. 117.4 per litre in May. Researchers said this trend shows that inflation is not only coming from higher demand in the market, but also from government-controlled costs that affect nearly every sector.
Transport and Energy Costs Hit Consumers Hard
The biggest impact of higher fuel taxes is visible in transport and energy-related expenses. When petrol and diesel become more expensive, the cost of moving goods, running public transport, operating generators, and managing business logistics also goes up. These costs are eventually passed on to consumers through higher prices of food, household items, construction materials and other daily-use goods.
PRAC noted that transport inflation reached 36.8 percent year on year in May. Housing, electricity, gas and fuel costs also increased by 16.8 percent. Together, these two major categories added around 6 percentage points to the overall inflation rate of 11.7 percent, meaning they accounted for more than half of headline inflation.
For ordinary households, this kind of inflation is especially difficult because it affects essential spending. Even families that do not own cars or motorcycles feel the pressure when transport costs raise prices at shops and markets. Small businesses also face higher operating costs, particularly those that depend on deliveries, generators, commercial transport or raw materials moved by road.
Diesel Prices Create Wider Supply Chain Pressure
The report gives special attention to diesel because its impact on the economy is wider than petrol. Diesel is heavily used in freight transport, agriculture, buses, trucks, industrial operations and supply chains. A rise in diesel prices can therefore increase the cost of producing and delivering goods across Pakistan.
According to the study, the government temporarily removed the diesel levy in April when international prices surged. However, the levy was reintroduced in May and then raised five times within 29 days, moving from Rs. 28.7 per litre to Rs. 68.9 per litre by the end of the month. Researchers warned that such repeated increases quickly spread through the economy and can raise food, consumer goods and industrial product prices.
The report also points to a change in the traditional price relationship between petrol and diesel. In the past, diesel was usually kept at a meaningful discount to petrol because of its importance for agriculture and commercial transport. By the end of May, however, petrol and diesel prices had almost converged at around Rs. 381 per litre. This suggests that taxation, rather than only international crude oil prices, is now playing a major role in local fuel prices.
Why Interest Rates May Not Solve This Inflation
PRAC describes the current inflation cycle as largely cost-push inflation. This means prices are rising because the cost of production, transport and utilities is increasing, not because consumers are spending too much. In such a situation, higher interest rates may have limited impact because monetary policy cannot directly reduce petroleum levies, electricity tariffs or other government-imposed charges.
The report criticizes the policy mismatch between fiscal and monetary authorities. On one side, the government raises fuel levies to increase revenue. On the other side, the State Bank of Pakistan responds to rising inflation by keeping borrowing costs high. This combination can hurt businesses because they face both higher input costs and more expensive loans.
For manufacturers, retailers, farmers and transporters, this creates a difficult operating environment. Higher borrowing costs discourage investment, while higher fuel costs reduce profit margins. Consumers then face the final impact in the form of higher prices and weaker purchasing power.
Policy Choices Will Decide Future Price Pressure
The findings come at a time when inflation has again become a major concern for Pakistan after falling sharply last year. The report warns that policymakers need to clearly separate demand-driven inflation from fuel levy-driven inflation before deciding on the right response.
If inflation is being driven mainly by taxes and administered prices, then simply using interest rates to cool the economy may not provide relief to consumers. Instead, the government may need to review how petroleum levies are adjusted, especially when global oil prices fall. A more balanced approach could help protect revenue while also giving some relief to households and businesses.
The report’s central message is that fuel taxation is no longer just a budget matter. It has become a major economic issue that affects transport, industry, agriculture, household budgets and overall price stability. Unless this pressure is managed carefully, Pakistan could continue to face rising costs even when international oil markets are relatively stable.
