Last week’s US inflation report offered some encouraging news. Core price momentum appeared to be easing as of August, and households under cost-of-living strain could be forgiven for hoping the worst had passed. Commodity analysts are urging caution. The record run-up in diesel prices in the United States and Europe over recent weeks, they argue, threatens to give inflation a lasting push unless the underlying supply problems are addressed soon. The reason is structural: diesel is not just another fuel, and its effects on the broader economy are powerful, widespread and delayed.
Societe Generale analysts Michael Haigh and Jeremy Sellem described the issue in a report on Monday. “Diesel is woven into almost every layer of the global economy,” they wrote, making it “one of the most pervasive channels through which an energy shock can feed into headline and core inflation.”
The explanation lies in how the fuel is used. Diesel powers trucks, tractors, construction equipment, heavy industry, ships and many kinds of machinery, and in some regions still heats buildings. A rise in its price therefore passes into an extremely broad range of goods and services: food moved by truck, materials delivered to building sites, manufactured products shipped across oceans. Unlike gasoline, whose price is visible to every motorist but mainly affects household budgets directly, diesel enters the economy through business costs, and businesses pass those on to customers over time.
That timing is the second point. Because the pass-through works with a lag, an inflation reading that looks benign today does not prove that the shock has been absorbed. Producers and retailers may take months to adjust prices, so a diesel spike in the autumn can show up in consumer prices well into the following year.
The scale of the increase explains the concern. US retail diesel prices have risen by more than 30% since early July and are hovering near all-time highs, according to American Automobile Association data. Diesel has exceeded a record $6.50 a gallon in the United States and €2.24 per litre in Europe in recent weeks.
This shock differs from the one in 2022 in two respects. Crude oil prices have risen even more than they did then. And refining capacity has been knocked out in the Middle East and in Russia because of the wars underway there. Refining matters because diesel is a product of refineries, not simply of crude oil: even with ample crude, a shortage of processing capacity constrains diesel supply and pushes its price up disproportionately.
The strain on refining is not limited to damaged plants. American refineries are running flat out, at about 97% of capacity as of the latest count. At that level, the chance of breakdowns increases, and maintenance cannot be postponed indefinitely. Delaying a shutdown can postpone the problem but not remove it. An unplanned outage at a major facility would tighten supply further just when stocks are already stretched.
In response, the Group of Seven agreed on Friday to release emergency oil and diesel stocks. The Societe Generale analysts argue that such releases will have only a short-term effect and risk “borrowing supply from the future.” In their words: “The lower inventories fall, the smaller the buffer against the next disruption and the greater the risk that today’s price relief ultimately gives way to an even sharper price response.” In effect, emergency stocks buy time, and the question is whether that time is used to restore supply or merely to defer the problem.
The analysts also found a strong correlation between movements in diesel prices and surprises in US inflation. Their model suggests that next week’s September consumer price index could show annual inflation of 4%, against a consensus forecast of 3.6%. They stress that this is not a formal forecast, but it is a warning about the risks to the upside, and the euro area has already shown one: September inflation there surprised to the upside on Friday.
The longer-term arithmetic is equally important. If underlying supply does not return to normal by the end of the year, the year-on-year inflationary impulse from diesel may not fade until the third quarter of 2027. That would extend the period in which central banks face higher-than-desired inflation, and it would complicate decisions about interest rates in an economy that already shows signs of strain.
Washington’s own attempts to respond appear unlikely to provide much relief. Bloomberg Economics assesses that the administration’s latest diesel effort is unlikely to help much, and the president has sought to ease restrictions on the use of a tax-exempt variety of diesel. A US ban on diesel exports, which has been discussed, would carry its own costs: Chevron’s chief executive, Mike Wirth, said on Tuesday that it could result in higher prices in some parts of the country and cause problems with other nations that rely on American supplies. A ban might lower prices in some domestic markets at first, but it would shift the burden to allies and could prompt retaliation or lead to shortages elsewhere.
Meanwhile, the US blockade of Iran is keeping dozens of laden tankers bottled up along that country’s coast, which illustrates how closely the diesel problem is tied to geopolitics. Without a change in the supply picture, the room for policy to make a difference is narrow.
The risk comes against a background in which the US economic expansion is in its seventh year and no recession is in sight, yet, by many measures, people are unhappy. Cost-of-living pressure is a political as well as an economic issue, and a renewed upward push in prices would add to it. Elsewhere, the World Bank notes that Asian economies have rolled out more energy subsidies than their peers and will not be able to sustain them if prices remain high, which suggests that the shock may spread unevenly across the world.
The main lesson of the diesel episode is that the headline measure of inflation can improve while a significant cost shock is still working its way through the system. Three things will indicate whether the pessimistic scenario materialises: the September inflation figures due next week; the state of refinery operations, including any unplanned shutdowns; and whether supply in the Middle East and Russia recovers. If those stabilise, the push from diesel may fade early next year. If they do not, the analysts’ warning is that households and policymakers should plan for inflation to stay uncomfortable for much of 2027.
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