U.S. gasoline prices reached about 4.33 dollars a gallon, up roughly 45% from levels before the war broke out in late February, according to data from the American Automobile Association, while diesel has jumped more than 65% since then to surpass 6.27 dollars a gallon for the first time ever, adding to inflationary pressures six months into the war with Iran.
Energy costs feed into transportation and production
The impact of rising diesel prices extends beyond drivers’ transportation costs, as diesel is used to operate farm equipment and transport, refrigerate and distribute goods. As products move through production and shipping stages, energy costs gradually become embedded in their final prices, leaving companies to choose between absorbing the increase and passing part of it on to consumers.
Airfares rose 23.4% year on year in August. Fuel was not the only factor behind the increase, but strong demand allowed airlines to pass a larger share of higher jet-fuel costs on to customers.
Core inflation at 2.4% in August
U.S. core inflation, which excludes food and energy, stood at 2.4% year on year in August, slightly below July’s rate, while food prices rose 2.7%. The figures indicate that the oil shock was reflected directly in energy components without, through August, turning into a broad increase across other prices.
Oxford Economics estimated that the indirect impact of higher energy prices remained very limited in the second quarter and could become more apparent in the third quarter. Shipping and supply contracts and hedging operations delay the pass-through of costs, but persistently high prices could put greater pressure on companies’ profit margins and prompt them to pass on a larger share of their expenses.
Markets await the Federal Reserve’s interest-rate decision
Oil is hovering around 100 dollars a barrel, up roughly 45% since early July. If prices remain at these levels, the shock could feed through to transportation, food and services, and then into core inflation, making the Federal Reserve’s task of containing price pressures more difficult.
Markets are pricing in a 25-basis-point increase in the Federal Reserve’s interest rate to a range of 3.75% to 4% this week, with the possibility that it may not be the last increase if inflationary pressures stemming from energy costs intensify.
