Diesel prices jumped in the second week of July as hostilities resumed in the Middle East and as Russia cut off exports of refined products.
These higher prices will act a modest drag on growth and push inflation higher when the July data is released.
The U.S. average retail price of diesel moved back to $5.11 per gallon, which is below the wartime high of $5.69 posted on April 8.
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While the public will focus on the price of gasoline and its return above $4 per gallon, that increase does not pose a real risk to growth.
Rather it is the price of diesel that poses the bigger risk as the costs of disrupted supply chains are passed through to places such as grocery stores.
U.S. inventories of distillate fuel oil, which is essentially diesel and heating oil, are now at 20-year lows. As of the second week in July, inventories were 16% lower than in January, with the U.S. Energy Information Administration reporting supplies about 11% below the five-year average for this time of year.
More than gasoline, the implications of a diminished supply of diesel are far reaching, particularly for the higher cost of agricultural products that have a direct effect on food prices and household balance sheets.
In the most recent cycles, distillate stocks have peaked in January and then bottomed out in July after the spring planting.
But this year’s decline in inventories is more pronounced, and it will only add to the pricing pressures throughout the supply chain.
Beyond the rising cost of the harvesting itself, transportation costs will be pushed up, and those higher prices will be passed on to wholesalers, retailers and, finally, to consumers.
The takeaway
Increases in diesel prices are symptomatic of reduced inventories of distillate fuels now at 20-year lows.
We expect higher transportation costs to continue to pressure food and most other goods higher for consumers and for all aspects of the business community.
