The link between the supply shock that has pushed up the cost of diesel and transportation, and, in turn, food is evident in the April pricing data.
Producer prices were 6% higher in April than the year before, a cumulative effect of the tariffs and, now, surging energy prices.
Consumer prices also accelerated, rising by 3.8% in April, up from 2.4% in January. Because producer prices tend to front-run consumer prices, the 6% spike in the producer price index suggests that inflation has further to go.
Get Joe Brusuelas’s Market Minute commentary every morning. Subscribe now.
These increases are not likely to end anytime soon. Businesses and households should anticipate a sustained increase in food costs as higher fuel and transportation prices are passed along.
Businesses and households should also anticipate another round of price increases in groceries later this year to reflect the higher cost of petroleum-based fertilizer and what could be diminished crop yields.
Our forecast is that inflation will reach 4.5% in the near term with risk of a faster pace, with longer-term estimates to be determined by the resolution to the Strait of Hormuz closure and the rebuilding of the energy infrastructure damaged by the Iran war.
In the United States, the logistics sector, and the trucking industry in particular, form the backbone of the consumer-based economy. With the price of diesel now 62% higher than last April, we expect the repercussions of the energy shock to affect all aspects of consumer behavior, and especially household spending on food.
Diesel moves the world
At $5.64 per gallon as of the second week of May, the U.S. average price of diesel was just six cents below the 2022 price during the shutoff of Russian energy to Europe.
The price could go higher. The effective closure of the Strait of Hormuz, which accounts for 20% of the global energy supply, will have further implications on the American economy.
It is evidently difficult for some U.S. policymakers to comprehend that petroleum products, whether extracted from the Gulf of Mexico or Saudi Arabia, are bought and sold on a global marketplace, with prices set according to the laws of supply and demand.
If there is a shortage of crude oil anywhere in the world, its price will be bid up as buyers scramble for a limited supply.
The increased price of diesel will have far-reaching consequences beyond the pump for households, and these consequences will last far longer than a couple of weeks.
Diesel is what moves household items and clothing from the container ships at the Port of Los Angeles to the trains and warehouses across the nation.
Farms are powered by diesel, with food grown by petroleum-based fertilizers that are transported to consumers and businesses in a vast supply chain that relies on diesel.
So it is no surprise that truck transportation is highly correlated with the price of diesel, with a correlation coefficient of 0.64.
From 2004 to 2006, the price of diesel accounted for 46% of the variation in the producer price index, using a simple regression analysis, with spikes in the PPI for truck transportation coinciding with spikes in the price of diesel.
The recent spike in diesel and truck transportation costs is much higher than past increases. Just as in 2022, we expect the increase in transportation costs to outlive the war.
The takeaway
The lower global supply of petroleum products shipped through the Strait of Hormuz has already pushed the nominal price of diesel to within six cents of its highest point in 2022.
The consequences of that spike will have an enduring effect on the price of moving goods and, ultimately, food to households across the income spectrum.
