Diesel Surge Drives Inflation to 3.7% Ahead of Midterms

Key points

• Headline inflation is forecast to rise to 3.7% year-over-year, with a monthly increase of 0.6%.
• Diesel prices have jumped 75% since the Iran war began, significantly impacting agricultural and transport sectors.
• Core inflation is expected to reach 2.5%, driven by rising airfares and higher prices for new iPhones.
• The Federal Reserve is expected to raise interest rates again, potentially at its October 27-28 meeting if data is hot.
• Trump’s deal with Russia to release diesel is criticized for being insufficient to lower global fuel prices.

Background

Inflation has been accelerating since August, when the annual rate was 3.4%. The Federal Reserve raised interest rates once this year, and previous data showed gasoline prices accounting for a third of the monthly increase. Recent archive coverage highlights that energy costs have pushed wholesale prices higher, while food banks in Appalachia are rationing due to rising gas costs and federal aid cuts. The current situation extends these trends, with diesel now becoming the primary driver of price increases.

How outlets are covering it

NBC News emphasizes the political implications of high inflation for the midterm elections, noting that agricultural states like Kansas and Iowa are seeing Democrats outperform in Senate races due to cost-of-living concerns. CNBC highlights the 'upside risk' from oil prices, warning that models may undershoot actual inflation outcomes. Forex.com focuses on the market reaction, noting that a 0.6% monthly increase is already priced in, and the core reading will be more impactful for the Fed. OilPrice.com argues that while headline inflation is high, core inflation remains stable, and the Russian diesel deal is unlikely to meaningfully lower prices due to constrained supply and damaged refineries. There is a consensus that energy costs are the primary driver, but disagreement exists on whether these costs will spread to other sectors or remain isolated to energy and airfares.

Why it matters

The September CPI report is the last major inflation data release before the November midterm elections. A higher-than-expected reading could pressure the Federal Reserve to raise interest rates again in October, potentially slowing economic growth. For voters, high inflation and the cost of living are top concerns, which could impact the Republican party's ability to maintain control of Congress. For businesses, rising diesel and oil prices are increasing operational costs, particularly in agriculture and transportation, which could lead to further price increases for consumers in the coming months.

What to watch

The Federal Reserve is expected to decide on another interest rate hike at its October 27-28 meeting, with markets currently pricing in a 19-20% chance of an increase. If the CPI data comes in hotter than expected, the urgency for a rate hike could increase. In the long term, the impact of the Russian diesel deal will be monitored, but analysts expect it to have minimal effect on global fuel prices. The Federal Reserve will continue to monitor core inflation and labor market data to determine its next move, while politicians will use the inflation data to shape their campaign messages in the lead-up to the midterms.