West Asia Conflict Threatens to Spike Inflation in Nepal

With the escalation of conflict between the US-Israel alliance and Iran in West Asia, prices of petroleum products, consumer goods, construction materials, hardware items, and plastic products have begun to surge in Nepal.

The domestic market is already experiencing a severe shortage of cooking gas. Nepal Oil Corporation has raised prices of diesel, kerosene, and petrol significantly, prompting transport entrepreneurs to demand fare hikes. Officials at the Department of Transport Management have confirmed that a proposal for revised fares has been submitted to the Ministry of Physical Infrastructure and Transport.

As freight costs rise, the cost of industrial and consumer goods is expected to increase accordingly. With commodity prices already elevated and services such as transportation and restaurants likely to become more expensive, inflation—which had remained under control for over a year—now shows signs of accelerating.

In an import-dependent economy like Nepal's, international fuel price hikes have a direct impact. Experts note that rising petroleum prices increase transportation costs, which in turn affects everything from food grains to construction materials, putting pressure on overall consumer prices. Last week, Nepal Oil Corporation raised the price of petrol by Rs 15 per liter and diesel and kerosene prices by Rs 10 per liter.

Former executive director of Nepal Rastra Bank and economist Dr. Gunakar Bhatta said the fuel price hike will put pressure on overall consumer inflation. A study by the International Monetary Fund shows that a 10 percent increase in oil prices raises inflation by 0.4 percentage points while reducing economic growth by 0.15 percentage points. If the conflict persists, some projections suggest oil prices could rise by 25 percent, potentially exerting significant pressure on consumer inflation.

Nepal Rastra Bank has set a target of keeping inflation within 5 percent for the current fiscal year 2025/26. Consumer inflation, which has remained below 5 percent since mid-January 2025, stood at 3.25 percent in mid-February 2026. In mid-October to mid-November 2025, the rate had dipped to as low as 1.11 percent.

Dr. Ram Sharan Kharel, executive director of Nepal Rastra Bank's Research Department, said the West Asian conflict will impact the overall economy.

"Fuel prices are rising, which increases production and transportation costs, ultimately raising consumer inflation," he said. Noting that Nepal's inflation has recently remained at a low point, he projected a gradual increase. He added that if the conflict affects sectors such as agriculture, remittances, and tourism, the country's economic growth could also face significant repercussions.

During Russia's invasion of Ukraine, inflation in Nepal soared, reaching around 9 percent in some months. Currently, due to the ongoing conflict, oil supply through the Strait of Hormuz—located between Iran and Oman—has nearly halted. Approximately 20 percent of the world's total oil supply passes through this strategic waterway. Consequently, international crude oil prices have surpassed $100 per barrel. Iran has warned that if attacks against it continue, oil prices could reach $200 per barrel. Supply chains for various goods beyond oil have also been disrupted.

Economist Dr. Bhatta noted that supply chain disruptions often lead to black marketeering and price hikes, which will drive overall consumer inflation upward.