Diesel Price Surge Threatens Consumer Costs Amid High Inflation

Diesel prices have surged 68% since the start of the Iran war, outpacing the increase in gasoline prices, according to data from AAA. This spike threatens to raise costs for consumers across various goods, from food to physical items, at a time when inflation remains high. Michael Reid, head of U.S. economics at the Royal Bank of Canada, warned that this will put "another squeeze on the consumer," particularly affecting lower- and middle-income households.

Average diesel prices reached $6.32 per gallon on Tuesday, up from $3.76 per gallon on February 27, the day before the U.S. and Israel bombed Iran. The Group of Seven nations agreed to release diesel stocks to combat rising fuel prices, while President Donald Trump signed an executive order allowing broader use of cheaper red-dyed diesel. The Iran war and Russia's conflict with Ukraine have disrupted oil supply and refining infrastructure, contributing to higher diesel prices.

Diesel is crucial for transporting goods via trucks, trains, and ships, and its price increases indirectly impact consumers through higher store prices. Mark Zandi, chief economist at Moody's, noted that while gas price hikes are immediately noticeable, diesel's effects are more subtle but widespread. For every $1 increase in diesel costs, inflation typically rises by 0.1 percentage points, with the current $2.50 per gallon increase since the Iran war potentially adding 0.25 percentage points to inflation.

Goldman Sachs expects diesel prices to remain high through 2027, predicting they will boost food prices by 0.2 to 0.4 points over the coming months. The strategic release of diesel by the G7 is unlikely to significantly lower prices, according to Reid, who warned that prolonged high energy prices could further strain consumer goods.