West Asia conflict triggers sharp input cost surge, raises inflation concerns: Crisil

The ongoing West Asia conflict has triggered the biggest oil shock seen globally in recent years, with the closure of the Strait of Hormuz widening the impact across multiple input categories, according to a Crisil analysis. 

The report said manufacturers are already grappling with elevated costs of critical raw materials such as copper and aluminium while the disruption in energy supplies has further intensified pricing pressures. 

Crisil’s input-output ratio, based on the Wholesale Price Index (WPI), crossed the 1.0 mark in April after remaining below that level for 44 consecutive months. The ratio stood at 1.02, driven by a sharp 6.2% month-on-month increase in input prices, while output prices rose a modest 0.7%. 

Surge in input costs

Input costs surged due to higher energy prices, particularly crude petroleum, natural gas, and mineral oils. Manufacturing costs also increased across sectors such as steel, basic chemicals, fertilisers, plastics, synthetic rubber, man-made fibres, plastic products, non-ferrous metals, and other non-metallic mineral products. 

Output prices, meanwhile, were pushed up by higher food prices, especially dairy products, along with rising manufacturing costs in pharmaceuticals, furniture, apparel and automobiles. 

The last time the input-output ratio crossed the 1.0 mark was in March 2022 following the outbreak of the Russia-Ukraine conflict. The ratio had then remained above 1.0 for five consecutive months. 

According to the report, input costs are expected to remain elevated this year even after the Strait of Hormuz reopens, keeping pressure on manufacturers’ margins. 

The report noted that while WPI inflation would be the first to reflect the impact of rising input costs, the increase is likely to gradually percolate into consumer prices as well. With domestic demand remaining resilient so far, companies may have room to pass on higher costs to consumers, thereby supporting margins. However, this could also lead to upward pressure on Consumer Price Index (CPI)-based inflation, particularly core inflation, in the coming months.