Clouds Gather Over Consumer Spending

West Asia Conflict Continues to Pose Inflation Risks

The month of May has begun, but a conclusive end to the West Asia conflict is nowhere in sight. As a result, the full quarter of its impact on FMCG companies is likely to be visible in the coming months. The main risk from the conflict is inflation and its spread.

The government has managed to keep the lid on consumer fuel price inflation thus far, but it may not be able to do so indefinitely due to its fiscal impact. The sharp increase of 48 percent in commercial gas cylinder prices in Delhi shows the scale of inflation that's headed our way. Even a partial pass-through to retail fuel prices will be enough to send inflation up. The end to the conflict remains uncertain, and even when it does wind down, the time taken for energy prices to cool down may be longer than we would like.

The impact of the conflict is not limited to energy prices. Fertiliser prices have increased, and the recent spike in palm oil prices is a direct result of the increase in crude oil prices. This has resulted in domestic edible oil prices moving up sharply in recent months, which will feed into consumer price inflation. Palm oil and its derivatives are used in a wide range of processed foods and even in home and personal care categories.

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Hindustan Unilever and Unilever's Inflation Forecasts

Hindustan Unilever's management has seen a cost inflation of 8-10 percent so far in their material cost base while they have taken price increases of 2-5 percent in the affected categories. Their parent Unilever has revised upwards its own inflation forecast for 2026 sharply, and it said 50 percent of the net inflation is expected to be in home care alone, of which 70 percent is expected to be felt in emerging markets. Global consumer companies are already contemplating price increases, as they face a challenging time ahead.

World Bank's Commodity Price Forecasts

The World Bank's commodity price forecasts for April 2026 give an idea of what lies ahead. It expects a 15.5 percent increase in the total commodity price index in 2026 with energy rising by 23.6 percent. Food prices are expected to increase by 2.4 percent and fertilisers by 30.7 percent. Metals and minerals and base metals sub-groups are also expected to see sharp increases, of 16.6 percent and 19.2 percent, respectively.

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A challenging time lies ahead of FMCG companies in particular, and for the consumption economy in general. Already, the March quarter results of FMCG companies that have reported earnings have shown an increase in material costs. Since energy prices were low and expected to go lower before the war began, they may not have locked into forward contracts. The spike in prices would have hit them hard, if that was the case. On the product price front, since companies believed the war was going to be a short affair, they have been going slow on price hikes.

Impact on Consumption Demand

A bigger challenge may await in the form of the damage done by inflation to consumption demand. A recent note from India Ratings points to a risk to consumption in FY27 from: inflation rising to 4.4 percent from 2.1 percent a year ago due to spike in energy prices, El Nino setting in as predicted from mid-2026 and supply disruptions. Higher inflation will pull down real wage growth, posing a risk to consumption, as high wage growth was one of the drivers of private final consumption expenditure in FY26. If this plays out, the economic damage due to the war will be felt not just on daily essentials, but on discretionary consumption goods as well.