Torsten Slok, Chief Economist at Apollo Global Management, has warned that the Federal Reserve may be overlooking the serious inflation threat posed by the dramatic surge in U.S. diesel prices. Unlike gasoline price increases, which primarily affect energy expenditures, diesel costs are pervasive across various economic activities, including goods transportation, retail supply chains, and data center construction. Slok emphasizes that this widespread impact means higher diesel prices are likely to filter into the core Consumer Price Index (CPI), affecting categories beyond just energy.
Slok highlighted the significant difference between the inflationary impact of diesel and gasoline. Diesel's role in the transportation of goods, logistics for retail supply chains, and data center construction means that demand for it is relatively inelastic. This forces businesses to pass on increased fuel costs, ultimately reaching consumers. The average U.S. diesel price has soared 83% this year to $6.50 a gallon, compared to a 59% rise in gasoline prices over the same period, exacerbated by disruptions to crude oil supplies.
This "second-round transmission" of costs differentiates the diesel price shock from typical energy price fluctuations. While the Fed usually focuses on core inflation trends that exclude energy and food, Slok argues that if higher diesel prices elevate costs for transportation, construction, and business operations, the energy shock will translate into broader inflationary pressure. This situation is particularly critical as the Fed has recently resumed rate hikes, making their challenge in controlling inflation potentially much greater if diesel prices remain elevated and push up core inflation.
Slok also noted that the current AI investment boom is a key factor supporting the U.S. economy, contributing about 1 percentage point to GDP growth, or roughly half of the overall economic growth. This creates a complex policy environment for the Federal Reserve: strong economic resilience driven by AI, alongside persistent inflationary pressures from diffusing energy costs. He suggests that a resolution to geopolitical tensions, like the U.S.-Iran conflict, could alleviate energy price pressures and potentially allow the Fed to avoid further rate hikes, though this outcome remains uncertain.
