Pakistan inflation hits 22-month high as U.S.-Iran crisis threatens

ISLAMABAD: Pakistan’s inflation surged to a 22-month high in May, underscoring mounting economic pressures from the ongoing U.S.-Iran conflict and raising questions about the government’s ability to achieve its inflation target of 8.2 percent in FY2026-27.

Gwadar Pro quoting the data released by the Pakistan Bureau of Statistics (PBS), stated, headline consumer price index (CPI) inflation rose to 11.7 percent year-on-year in May 2026, up from 10.9 percent in April and 3.5 percent in May last year. On a monthly basis, prices increased by 0.5 percent.

The latest reading, the highest since July 2024, came just days after the government unveiled an ambitious economic roadmap targeting 4 percent GDP growth and 8.2 percent inflation for the next fiscal year.

The economic targets were discussed during the Annual Plan Coordination Committee (APCC) meeting chaired by Federal Minister for Planning, Development and Special Initiatives Ahsan Iqbal.

Officials informed the meeting that Pakistan’s economy recorded provisional growth of 3.7 percent in FY2025-26, supported by gains in industry and services, while exports reached $34 billion and remittances climbed to $33.9 billion.

Despite these improvements, economists warn that escalating energy prices linked to Middle East tensions could keep inflation elevated well into the next fiscal year.

PBS data showed urban inflation rising to 11.8 percent in May from 11.1 percent a month earlier, while rural inflation increased to 11.5 percent from 10.6 percent.

The Sensitive Price Indicator (SPI), which tracks prices of essential commodities, also rose 12 percent year-on-year.

“Pakistan’s CPI inflation has risen to 11.7%, which is highly abnormal. In normal times, inflation may increase by two to three percentage points, but this jump reflects extraordinary external pressures,” Islamabad-based economist Malak Tanveer Ahmad told Gwadar Pro.

“The biggest driver is the U.S.-Iran conflict and disruptions in the Strait of Hormuz, which pushed oil prices from around $65-$70 per barrel before the crisis to above $100, and at one point nearly $120,” he said.

“Pakistan is an import-dependent economy, particularly in energy. Higher oil and LNG costs are feeding directly into inflation and will also affect economic growth.”

Ahmad said Pakistan’s weekly energy import bill had increased from around $300 million before the conflict to approximately $500-$600 million, placing additional pressure on foreign exchange reserves and the rupee.

“If the conflict continues, the rupee is likely to come under greater pressure because more dollars will be required to finance energy imports,” he said.

The State Bank of Pakistan had already warned during the APCC meeting that inflation could remain around 8.2 percent in FY2026-27 due to uncertainties arising from tensions in the Middle East and their impact on global energy markets.

Professor Zafar Habib of the Institute of Management Sciences (IMSciences), Peshawar, said the inflationary impact of the conflict extends far beyond Pakistan.

“The impact is not limited to Pakistan. The entire world is feeling the effects of the energy crisis triggered by the conflict,” he told Gwadar Pro.

“Energy prices do not affect only oil and gas. They influence electricity, transportation, agriculture, and almost every sector of the economy,” he said.

“Countries that are heavily import-dependent, such as Pakistan, are particularly vulnerable because higher energy prices put additional pressure on their external balances,” Habib said, adding that the oil price shock had become a key driver of rising production and transportation costs.

The inflation uptick comes as the government seeks to sustain economic recovery through exports, investment, and infrastructure development. During the APCC meeting, Ahsan Iqbal stressed that Pakistan must reduce its dependence on borrowing and pursue export-led growth.

“Exports are the master key to economic sovereignty,” Iqbal said, adding that long-term economic stability depends on competitiveness, industrial development, and export-oriented foreign investment.

The government aims to achieve 4 percent economic growth in FY2026-27, with agriculture expected to expand by 3.8 percent, industry by 4 percent, and services by 4.2 percent.

More than 98 percent of development resources in the upcoming fiscal year are expected to be allocated to ongoing projects in water, energy, transport, and other core infrastructure sectors.

Ahsan Iqbal also described projects under the China-Pakistan Economic Corridor (CPEC) as the “backbone of the national economy,” highlighting their role in supporting long-term growth and connectivity.

However, economists caution that achieving both growth and inflation targets may become increasingly difficult if geopolitical tensions persist and oil prices remain elevated.

“Pakistan remains highly exposed to energy price shocks and disruptions in remittances. If Gulf tensions keep oil above $100 per barrel, double-digit inflation could persist through much of FY2026-27,” Dr. Salman Ali Bettani, Assistant Professor at the School of Politics and International Relations, Quaid-i-Azam University, told Gwadar Pro.

“The main victims would be ordinary households facing higher food, transport, and electricity costs. Even if a U.S.-Iran agreement is reached, it would likely take several months, for structural reasons, before lower energy prices translate into meaningful relief for consumers and inflation,” Bettani added.

Analysts say that while strong export performance, rising remittances, and continued infrastructure investment could support economic activity, inflation remains one of the biggest risks facing policymakers in the coming fiscal year. Much will depend on developments in global energy markets, exchange-rate stability, and the government’s ability to maintain fiscal discipline amid growing external uncertainties.