Food inflation has always been at the centre of the inflation debate in India. When tomato prices go up, there are headlines. When onion prices rise, policymakers act. But there is another kind of inflation creeping into the economy at present, which is transport inflation.
In May 2026, India had its 4th fuel price hike in a month. crossed Rs 102.12 per litre in Delhi, touched Rs 95.20. Petrol prices in Hyderabad reached Rs 115.62 per litre. Transport inflation is not usually as dramatic as food inflation.
About 2.45% of the CPI basket is accounted for by railways, buses, taxis, auto rickshaws, school buses and aviation (transport services). A 5-10% increase in fares may have a further second round effect on headline inflation of 0.1-0.2 percentage points. It may sound trivial.
But when diesel prices rise, the cost of transportation increases across the supply chain and those higher costs are ultimately passed on by businesses to consumers. What we get is ‘invisible inflation’ – an inflationary force that hits almost everything but is rarely talked about in its own right.
This ‘network inflation’ as economists call it, reveals the actual peril of rising transport costs: a 3-rupee increase in diesel prices triggers a domino effect that goes much beyond the petrol pump, leading to a price rise in everything from wholesale vegetables in Azadpur Mandi and life-saving medicines in small towns to school lunches and everyday auto-rickshaw rides. In other words, even a small increase in the price of diesel can have ripple effects across agriculture, manufacturing, retail and services.
The May 2026 price revision cycle was also unusual in its speed – Delhi petrol surged from around Rs 94-95 per litre to over Rs 100 in less than two weeks. India has not seen such a steep phase of fuel price revisions since 2022. But macro indicators are deceptively calm. This gap between what households are feeling and what official indices are saying isn’t a statistical fluke. It highlights a basic flaw in the manner in which we measure and communicate the inflationary impact of transport costs.
The fuel-induced transport inflation is already being felt in at least three ways in the near term:
First, the regressive burden. Higher auto fares are affordable for a middle-class family but not for a daily wage worker. The majority of spending for the bottom two income quintiles is accounted for by transport and food. Transport costs form a large component of the price of food in rural areas because the rural poor rely on inter-district trucking to move produce. Higher transport costs mean higher costs of getting goods to the market and of buying goods from it.
Second, the small business spiral. India’s MSME sector, with 63 million people, is particularly vulnerable. Coimbatore Kirana store owner does not hedge diesel futures. He just absorbs the higher freight bill from his distributor then passes it on, one margin layer at a time.
Third, the feedback loop of food and transportation. India’s retail inflation is also directly linked to crude oil as it increases the prices of transport fuels, which in turn makes every item transported more expensive. Food makes up nearly 37% of the revised CPI basket. Any sustained shock to transportation costs will eventually pass through into food inflation — eroding the very disinflation that has underpinned India’s macro narrative in the past.
India’s logistics intensity – the ratio of logistics cost to GDP – remains very high at about 9-10%, significantly higher than the global best-practice benchmark of 6-8%. More developed economies are moving towards electric vehicles for last mile logistics but India’s freight network is still powered by diesel. This dependence generates persistence of inflation.
Food inflation usually corrects itself as harvests improve and supply answers. Transport inflation is not the same. Once freight rates, delivery charges and transportation fees go up they tend to stay high even when fuel prices are steady. Companies are generally reluctant to roll back price increases. Thus, temporary fuel shocks can leave lasting inflationary scars.
There is also a monetary policy complication that deserves far more attention than it gets. RBI targets 4% headline CPI inflation. But if transport inflation operates via second-round supply-side effects – not demand-pull and not classic wage-push – then tightening interest rates is a blunt and ineffective tool. Rate hikes will dampen demand but they will do precious little to reduce the cost of running a 12-tonne truck from Nagpur to Navi Mumbai.
The policy response therefore needs a wider perspective than just changing fuel taxes.
In the short run, excise rationalisation on diesel, already deployed as an occasional countercyclical tool, could be more transparently deployed as a rule-based buffer. The long-term solution is to cut India’s dependence on expensive road-based logistics. Ongoing investments in dedicated freight corridors, multimodal logistics parks, inland waterways, urban mass transit and railway freight networks can permanently lower transport costs. There is already evidence that rail is still significantly more cost-effective than road for moving freight.
But the most important intervention is perhaps rhetorical. The transport inflation story has to be stopped being treated as a second-order story – a footnote to food or fuel. Neither is it. Just as food inflation is keenly watched for its social implications, transport inflation should be watched for its economy-wide multiplier impact.
The next inflation shock in India might not start in vegetable markets. It could start with highways, freight corridors and fuel stations. By the time it appears in headline CPI data, the damage could have rippled through every layer of the economy. That is why transport inflation is not just one more inflation category. But it is the hidden inflation that silently sets the price of everything else.
(Disclaimer: The article has been authored by Dr Jaydeep Mukherjee, Professor of Economics at Great Lakes Institute of Management, Chennai. Views expressed are personal.)