Apollo's Slok Warns Fed May Underestimate Diesel Price Risk to Inflation

Torsten Slok, Chief Economist at Apollo Global Management, has warned that record-high diesel prices pose a greater threat to inflation than the Federal Reserve currently assesses—because diesel costs seep into the core Consumer Price Index (CPI), the central bank's primary monetary policy reference.

Speaking Friday on Bloomberg Television's Surveillance program, Slok explained that the transmission mechanism for diesel-related transportation costs differs fundamentally from that of gasoline. Because transporting goods is essential to retail supply chains and even data center construction, demand is highly price-inelastic, meaning cost increases are ultimately passed on to businesses and consumers.

"Diesel price increases actually enter CPI components beyond the energy sub-index," Slok said.

Fed Internal Divergence Emerges

Slok's remarks echo growing internal disagreement within the Federal Reserve. Chicago Fed President Austan Goolsbee warned this week that the central bank cannot ignore repeated and persistent supply shocks. "Once supply-shock-driven inflation becomes persistent, part of the rationale for 'looking through' it no longer holds," Goolsbee said.

With U.S. inflation still well above the Fed's 2% target, monetary policy direction faces heightened uncertainty.

Core Inflation Framework Under Challenge

In a research report this week, Slok systematically laid out his argument, directly challenging the limitations of the traditional core inflation framework. He argued that excluding food and energy prices from core inflation metrics is inappropriate for critical fuels like diesel.

"Diesel price increases do not stop at the energy component of CPI; they migrate with a lag into core goods and services," Slok wrote. "This is precisely the transmission mechanism that prevents the Fed from characterizing them as transitory."

According to Bloomberg data, the average U.S. diesel price has surged 83% year-to-date to $6.50 per gallon as of Thursday, compared with a 59% increase in gasoline prices over the same period. While the Iran conflict has disrupted crude oil flows from the Persian Gulf, driving energy prices broadly higher, diesel users have borne a particularly severe impact.

Can the Fed 'Look Through' Energy Shocks?

Minutes from the Federal Reserve's July Federal Open Market Committee (FOMC) meeting showed that most participants believed "earlier energy price increases" would gradually fade, helping to suppress inflation this year—a view directly at odds with Slok's warning.

However, following the Fed's September 16 rate hike—its first since 2023—Goolsbee's remarks signaled a shift in internal stance. He explicitly stated that when supply-shock-driven inflation becomes persistent, the logical basis for a "look-through" strategy weakens.

Slok described an implicit policy expectation within the Fed: hoping that a resolution to the Iran conflict would ease energy price pressures, thereby allowing the central bank to avoid further rate hikes. He characterized this scenario as "the current Hail Mary."

AI Spending Adds to Inflationary Pressure

Slok also noted that the boom in artificial intelligence-related spending is the primary reason the U.S. economy has remained resilient amid high interest rates. He estimates that AI-related activities currently contribute approximately one percentage point to GDP growth, accounting for roughly half of total current expansion.

This contribution spans multiple channels, including data center construction, energy demand, software spending, and the wealth effect from elevated stock prices. Notably, data center construction itself is highly dependent on diesel demand, creating a mutually reinforcing relationship between AI-driven economic expansion and rising diesel prices—further increasing the likelihood of persistent inflationary pressure.

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