I’m worried about the inflationary mindset taking off again. It’s the Fed’s job to step on the brakes before inflation turns into a runaway train.

By Wolf Richter for WOLF STREET.

The average retail price of on-highway diesel spiked by 24 cents in the latest week, and by 88 cents in four weeks, to a record $6.529 a gallon at gas stations on Monday, and that’s for the US overall, according to the EIA this morning. Year-over-year, the price of diesel has spiked by 74%.

California diesel prices spiked to $8.246 a gallon. While driving by gas stations, we’ve seen over $8 a gallon for weeks.

These are sobering sights, setting off the inflation alarm bells.

Republicans called for a diesel export ban. There is a shortage of diesel in the rest of the world, and US refiners provide much needed supply.

Year-to-date through August, the US produced 5.1 million barrels per day of distillate fuel oil (mostly diesel); imported almost none; and exported a record average of 1.74 million barrels per day over the past two months.

Diesel crack spreads, which are a rough measure of US refinery profit margins for diesel, are at record levels. And they come on top of the high price of crude oil. The result is a record high retail price of diesel.

So Iowa Sen. Chuck Grassley (R) urged President Trump to impose a diesel export ban, with the hope that such a ban would narrow the crack spread and thereby allow diesel retail prices to cool before the midterms.

The weekly diesel export data from the EIA is the most current measure, but also the roughest most incomplete estimate, and very volatile from week to week. And it’s seasonal. The 8-week-average provides a sense of the recent trends:

Diesel impacts inflation in the overall economy. Only a small portion of consumers drive vehicles with diesel engines (some pickups and SUVs, and some older European imports), so diesel prices impact only a small number of consumers directly.

But diesel prices – along with jet fuel and gasoline prices – feed into all kinds of transportation costs that consumers pay for directly, such as ecommerce shipping charges and airline fares.

And they’re also part of the input costs for a broad range of businesses, directly or via higher prices of goods and transportation services. And businesses will then try to pass on those higher costs via higher prices for their goods and services to consumers, other businesses, and governments.

The GDP price deflator, released by the Bureau of Economic Analysis, tracks inflation facing all economic entities: consumers (separately tracked by the CPI and the PCE Price Index), businesses (separately tracked by the PPI), and governments. It tracks inflation in the overall US economy and is the broadest inflation index in the US.

Inflation has been worse for businesses than for consumers as businesses could not fully pass on the cost increases without losing sales. This has shown up in the much hotter PPI inflation (overall PPI +5.4%; services PPI +4.5%; core goods PPI +5.0%; energy PPI +24%). So inflation in the overall economy has been worse than inflation that only consumer face.

Inflation in the overall economy had already spiked in Q2 by 6.4% annualized from Q1 (blue) and by 4.4% year-over-year (red). For Q3, at the current pace of those fuel-price increases, these overall inflation measures will look even worse.

The average retail price of gasoline, all grades combined, at gas stations on Monday spiked by another 16 cents from the prior week, by 39 cents in four weeks, and by $1.31 from a year ago, to $4.61 a gallon, nearly matching the May highs.

The average price in California rolled over $6 a gallon this week. But many gas stations have been charging over $6 for a long time.

These price increases of gasoline will enter directly into the inflation calculations for all-items CPI and the all-items PCE price index for September, to be released in October.

The spot price of jet fuel spiked by 34 cents over the past week, by 65 cents in four weeks, and by 115% from a year ago, to $4.418 per gallon, just a hair below the record of May 2022, per the EIA’s weekly measure of the Gulf Coast Spot Price.

Many airlines hedge part of their fuel purchases – a substantial part of their overall costs – and Delta operates its own refinery. So their cost increases don’t exactly track the spike of the spot price of jet fuel. But they are trying to pass those cost increases to flyers via higher ticket prices.

Airline fares are a component of the core inflation measures, and are a component of “core services” inflation. This is one of the ways that higher energy costs drive up inflation in services.

Air freight also faces higher fuel costs, which impacts all kinds of transportation costs that filter over time into prices of goods and services.

Repeated fuel price spikes can trigger the inflationary mindset, a phenomenon where consumers are willing to pay those higher prices because they’ll demand higher wages, and companies are willing to pay higher costs to their supplies and higher wages to their workers, confident that they can pass on those higher costs “plus some” to their customers and clients. This “plus some” factor was an important contributor to the inflation spike in 2021 and 2022, leading to a historic spike in corporate profits.

If and when the inflationary mindset takes off, inflation threatens to morph into a runaway train. It’s the Fed’s job to step on the brake early to prevent bigger damage. But lightly tapping the brakes might not work very well.

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