Türkiye on Friday announced it was raising retail electricity prices for households by 25% due to higher production and distribution costs, and was also increasing natural gas prices by the same amount on average.

Electricity has a weight of 1.27% in Türkiye’s inflation basket, while gas accounts for 1.08%. Based on those weights, a 25% increase in both categories is expected to raise April inflation by around 0.6 percentage points, according to economists' calculations.

Energy prices have been soaring after the U.S.-Israel attacks on Iran unleashed a conflict that has run for more than a month and effectively closed the Strait of Hormuz, through which a fifth of global oil and liquefied natural gas is shipped.

That came as a test for the world economies, including Türkiye, where authorities have acted to limit the pass-through of volatile energy costs to domestic prices.

Despite pricing pressures amid the Iran war, inflation in Türkiye dipped to 30.9% in March from 31.5% in February. On a monthly basis, consumer prices rose 1.9%, compared with 2.96% in February.

Economists say the direct impact of the price hikes could end up slightly higher because of the new tiered pricing system for high-consumption households.

Under the new system, households with high gas consumption will pay around 70% more than the regular tariff, following a similar approach already used in electricity pricing.

Energy and Natural Resources Minister Alparslan Bayraktar has said only around 12% to 13% of residential gas users consume above the threshold and will therefore face the higher tariff.

According to Friday announcements, natural gas prices rose by 18.61% for industrial consumers and 19.42% for power plants, while electricity tariffs were also increased by 17.5% for low-voltage public and services sector users, 5.8% for medium-voltage industrial consumers and 24.8% for agricultural users.

Those increases are expected to push up costs across manufacturing, transportation, logistics, agriculture and food production in the coming months.

Some analysts estimate that the total inflation effect, including indirect and second-round impacts, could eventually reach 2 to 3 percentage points over the next three to six months if energy prices remain elevated and companies pass on higher costs to consumers.

Türkiye, which imports most of the gas it consumes, carries this out predominantly through oil-indexed pricing and partly through instantaneous prices formed in the international spot market.

Türkiye used 16 billion cubic metres, or more than a quarter, of the gas ​it imported last year for electricity generation, according to market regulator EPDK. Gas, along ​with crude oil, constitutes the largest item in its energy import bill, which ⁠was $62 billion last year.

While geopolitical developments like the Iran war lead to sharp increases in import prices, these costs are generally not reflected to households.

Last month, authorities launched a "sliding-scale" system, which adjusts the special consumption ​tax (ÖTV) on fuel products and prevents higher oil prices from being fully passed through to consumers.

The government expects the tariff increases and tiered pricing system to reduce the fiscal burden of energy subsidies.

Last year, Türkiye spent around TL 650 billion (about $15 billion) on electricity and natural gas support, according to Bayraktar.

This year, the budget allocated for energy subsidies was cut to TL 305 billion with the transition to a tiered pricing system. However, if oil and gas prices remain elevated because of the Iran war, that amount could be increased.