Apollo Global Management Inc.’s Torsten Slok warned that record diesel prices pose a greater inflation threat than the Federal Reserve may appreciate because those fuel costs flow into the core consumer price index.
The breadth of diesel-related transportation expenses is different from gasoline’s, said Slok, Apollo’s chief economist. Demand is highly inelastic because shipping goods is vital for everything from retail supply chains to building out data centers, so price hikes will ultimately be passed on to businesses and consumers, he said.
“When diesel prices go up, that is really entering elsewhere in the CPI basket than in the energy line,” Slok said Friday on Bloomberg Television’s Surveillance.
Slok’s comment built on an argument he advanced in a research note this week: the traditional focus on core inflation — which excludes food and energy prices — doesn’t work with a fuel as crucial as diesel. “The rise in diesel prices does not stay in the energy line of the CPI but migrates with a lag into core goods and services, which is exactly the kind of pass-through the Fed cannot dismiss as transitory,” Slok wrote.
The nature of diesel-driven price pressure is crucial as the Fed plots monetary policy after its first interest-rate increase since 2023 and inflation remains well above the central bank’s 2% target. So-called core inflation excludes energy, and Slok argued Friday that the Fed can’t dismiss the run-up in diesel as transitory because of its spillover into core categories.
Minutes from the July Federal Open Market Committee meeting showed that most participants believed that “earlier energy price increases” would wane, helping mute inflation over the rest of the year. But this week, in the wake of the Fed’s Sept. 16 rate hike, Chicago Fed President Austan Goolsbee warned the central bank cannot ignore repeated and persistent supply shocks. “Once supply shocks to inflation become persistent, some of the logic behind ‘looking through’ no longer holds,” he said.
While rising gasoline prices squeeze motorists after the US war with Iran disrupted Persian Gulf crude flows, diesel users face an even bigger shock at the pump. The average cost for US diesel leaped 83% this year through Thursday to $6.50 a gallon, compared with a 59% jump for gasoline.
Slok identified the spending boom in artificial intelligence as the primary reason the economy has remained resilient despite higher interest rates, estimating that AI-related activity is currently adding roughly one percentage point to GDP growth. That accounts for about half of total growth at the moment, through data-center construction, energy demand, software spending and the wealth effect of elevated equity prices, he said.
He described a scenario in which the Fed’s implicit hope is that a resolution to the Iran war eases energy price pressure, relieving the central bank of the need to hike further. That outcome, he said, is “the Hail Mary right now.”
Written by: Jonathan Ferro, Lisa Abramowicz, and Annmarie Hordern @Bloomberg
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