Pakistan’s Inflation Crosswinds: Stable Fuel, Falling Gold & EU Rules Hit Textile Exports

The government’s decision to retain petrol and HSD prices for the next two weeks at Rs253.17/litre and Rs257.08/litre respectively, effective from January 16, 2026, reflects an effort to contain inflationary pressures in the short term. It indicates stabilization despite pressures from international oil price volatility and exchange rate movements.Given that changes in fuel costs feed directly into transportation, agriculture, and broadly into the Consumer Price Index, these fixed prices offer temporary relief but also suggest limited fiscal space to absorb external cost changes.

Gold’s retreat from record highs globally—and in Pakistan—is primarily attributed to technical correction following price surges, a firmer US dollar reducing attractiveness of non-yielding assets, and softening safe-haven demand as global tensions ease. For example, international spot gold prices dropped by $116 per ounce during a recent correction, leading to drops of over Rs10,000 per tola locally. Such movements matter for domestic investors, importers, exporters of jewellery, and reserve managers, with implications for FX demand, inflation hedging, and consumer behaviour.

The EU Green Deal rules, especially the CBAM, are increasingly relevant to Pakistan’s export sectors. Under these rules, exporters of carbon-intensive textiles may face tariffs or additional costs unless they can credibly document emissions and adjust production methods. This threatens Pakistan’s competitiveness in its key textile export markets, particularly Europe. Compliance will likely demand investment into greener energy, cleaner production technologies, and more rigorous supply chain management.

Strategically, these combined dynamics suggest several risk and opportunity vectors:

• For Pakistan’s economy: keeping fuel prices stable helps in short-term inflation management but risks lagging input cost absorption if international fuel prices rise.
• For gold market participants: recent decline creates buying windows, but volatility suggests hedges and portfolio diversification will be critical.
• For exporters, especially textiles: regulatory costs associated with the Green Deal may increase total cost of compliance in EU markets, making price competitiveness harder unless supply chains are upgraded.
• For investors and policymakers: monitoring global monetary policy, FX trends, and environmental regulation will be central to anticipating trade flows, currency risk, and investment climate.

Open questions include:

• How fully will the government be able to offset rising fuel costs if global oil prices increase or if rupee weakens further?
• To what extent can textile exporters in Pakistan access financing and technology to meet EU Green Deal standards without significantly increasing product costs?
• Will gold’s retreat accelerate if US interest rates remain high, and how will that affect portfolio flows and local bullion demand?
• What is the potential knock-on impact on inflation expectations in Pakistan if fuel or imported goods’ costs shift sharply?