Apollo’s Slok Says Fed May Be Overlooking Risk From Diesel Surge

US retail diesel prices have reached unprecedented levels, with the average nationwide price topping $6.50 per gallon for the first time. This surge, reaching $6.505 according to Bloomberg on September 20, 2026, and $6.52 per gallon by September 22, 2026, according to AAA and Nikkei Asia, marks a 77% increase from a year ago. This contrasts sharply with a 40% rise in regular gasoline prices and a 32% increase in Brent crude during the same period. The primary drivers are ongoing wars exacerbating a global fuels crunch, particularly due to reduced refining capacity following attacks on energy infrastructure in the Middle East and Russia, as well as bottlenecks in crude supplies from the Strait of Hormuz.

The rising cost of diesel is a significant concern for the economy because it is a crucial business input, powering trucks, trains, agriculture, and construction. Unlike gasoline, which is primarily a consumer expense, diesel's cost is embedded in the production and transport of almost all goods and services, leading to broad inflationary pressures. The producer price index for No. 2 diesel fuel rose 17.7% in August alone and is up 77.8% year-over-year. This has a lagging effect on input costs for sectors like construction, where nonresidential inputs are up 8.8% year-over-year.

Economists and the Federal Reserve are grappling with the implications of this diesel surge. The Federal Open Market Committee recently raised the federal funds rate by 25 basis points to a range of 3.75% to 4.00%, the first increase since July 2023. While the Fed cannot directly control oil prices, its strategy is to prevent this energy shock from causing widespread secondary inflation. However, concerns remain that the Fed's current monetary policy might not fully address the unique challenges posed by soaring diesel prices, which could lead to further economic vulnerabilities through winter and into 2027. The EIA forecasts distillate inventories to remain low, keeping retail diesel prices around $5.55 per gallon in Q4, but with significant upside risk.