With inflation expected to remain elevated even if tensions in the Middle East ease, the Congressional Policy and Budget Research Department (CPBRD) is urging policymakers to adopt a longer-term approach to the ongoing price shock.
The state think tank said inflationary pressures are likely to persist because of the lasting impact of the oil supply disruption, as well as the delayed transmission of higher fuel costs across the broader economy.
‘The ongoing crisis in the Middle East, whether or not it is resolved in the coming weeks, will have a lasting effect on domestic prices. The unlikely reopening of the contested Strait of Hormuz in the coming weeks will likely not result in slower inflation in the coming months,’ the CPBRD said in a discussion paper. Given these conditions, the CPBRD said policymakers must move beyond short-term relief measures and begin reassessing structural responses to sustained cost pressures.
Among the options raised by the think tank is a review of the tax burden on local businesses, warning that higher input costs are likely to squeeze already thin margins and further constrain operations.
Temporary tax relief, it said, could help firms absorb rising costs, sustain production and prevent job losses. The CPBRD also underscored the need to support household spending, noting that prolonged inflation is expected to erode purchasing power across income groups and weaken overall demand.
‘The crisis will reduce demand across all segments of society-not just from those who are poised to receive targeted transfers,’ the report noted.
The call for a longer-term response comes as the study found that the impact of rising oil prices is neither immediate nor uniform, with what economists call a ‘transmission lag’ delaying the full effect across sectors.
In the near term, transport costs absorb the shock first because of their direct exposure to fuel prices.
The study estimates that a typical oil price spike raises transport costs by about 1.59 percent, the largest response among all major price components.
With recent oil movements equivalent to around four to five such shocks, the actual increase in transport costs could approach double-digit levels as higher fuel prices are passed on to fares and logistics. Beyond transport, the impact is already becoming evident in non-food items, particularly utilities and other energy-dependent services.
The CPBRD estimates that non-food prices rise by about 0.34 percent per oil price shock, reflecting the broader pass-through of higher energy and logistics costs across the economy.
‘The projected persistence of the shock-as well as the expectation of more similarly sized shocks in the near future-strongly suggest elevated and rising non-food prices throughout the remainder of the year,’ it said. Food prices, meanwhile, have yet to fully reflect the oil shock.
The think tank attributed the muted initial response to production and distribution lags, including the use of existing inventories and the time required for agricultural output to adjust.
However, it warned that inflation in this segment is expected to accelerate in the coming months as higher transport and fertilizer costs feed into farm production and retail prices.
In March, inflation accelerated to 4.1 percent, the fastest pace in nearly two years, driven largely by transport costs, which surged to 9.9 percent and accounted for more than half of the overall increase.
Food and non-alcoholic beverages posted 3 percent inflation, while housing, water, electricity, gas and other fuels rose to 4.5 percent.
Over the longer term, the CPBRD said the government must reduce the country’s vulnerability to external shocks by diversifying energy sources and strengthening domestic production.
‘Responses to the present crisis necessarily must look beyond those strategies that have been deployed-and have failed to deliver the desired results,’ it said.
The report pointed to the need for investments in a more resilient and efficient energy sector, alongside reforms in agriculture, including improved logistics, adoption of modern farming technologies and stronger domestic production capacity to reduce reliance on imports.