Apollo Chief Economist Flags a Blind Spot in the Fed’s Inflation Framework
TREE NEWS reports: Apollo Global Management chief economist Torsten Slok is warning that record diesel prices pose an inflation threat that the Federal Reserve may be substantially underestimating — because diesel costs seep directly into the core consumer price index, the very gauge that anchors monetary policy. Speaking on Bloomberg Television’s Surveillance on Friday, Slok argued that diesel-related transportation costs transmit through the economy very differently than gasoline.
Because transported goods are indispensable to retail supply chains and even to data-center construction, demand for diesel is highly price-inelastic. Rising costs are ultimately passed through to businesses and consumers. “When diesel prices rise, that actually flows into CPI components outside of the energy line item,” Slok said.
An 83% Surge That Won’t Stay Contained
US average diesel prices have climbed 83% year-to-date to $6.50 per gallon as of Thursday, compared with a 59% rise in gasoline over the same period. A US-Iran conflict has disrupted crude flows through the Persian Gulf, lifting energy prices broadly, but diesel users have absorbed a particularly severe shock.
Slok laid out the argument in a research note this week, targeting the limitations of the traditional core inflation framework. He contends that excluding food and energy prices is inappropriate for a critical fuel like diesel. “Diesel price increases don’t stop at the CPI energy component — they migrate, with a lag, into core goods and services. That is precisely the transmission mechanism that prevents the Fed from labeling them transitory,” he wrote.
Fed Dissent Grows Louder
The warning echoes a widening split inside the Fed. Chicago Fed President Austan Goolsbee cautioned this week that the central bank cannot ignore recurring and persistent supply shocks. “Once supply-shock inflation becomes persistent, part of the basis for the ‘look-through’ logic no longer holds,” he said.
Minutes from the July FOMC meeting showed most participants expected earlier energy price increases to fade, helping suppress inflation over the year. That judgment stands in direct tension with Slok’s warning. After the Fed raised rates on September 16 — its first hike since 2023 — Goolsbee’s remarks signaled the internal position has begun to shift.
Slok described an implicit Fed expectation: that a resolution to the Iran conflict will ease energy price pressure, sparing the central bank from further tightening. He called this scenario “the current all-in bet.”
AI Capex Cuts Both Ways
Slok also identified the artificial intelligence spending boom as the primary reason the US economy has remained resilient despite high interest rates. He estimates AI-related activity contributes roughly one percentage point to GDP growth — about half of current total growth — through data-center construction, energy demand, software spending, and the wealth effect from elevated equity prices.
Crucially, data-center construction is itself highly dependent on diesel. That creates a mutually reinforcing relationship between AI-driven economic expansion and rising diesel prices, further raising the odds that inflationary pressure persists.
Market Implications
- Rates and bonds: If diesel keeps feeding core CPI, the Fed’s room to cut — or even to pause — narrows. Front-end Treasury yields and rate-cut expectations are most exposed; a hawkish repricing would steepen the curve.
- Equities: Transport-intensive sectors — logistics, airlines, railroads, industrials — face margin compression. Data-center and AI infrastructure names carry hidden fuel-cost exposure that markets may be underappreciating.
- Commodities: The diesel crack spread remains the cleanest expression of the supply disruption. Any escalation or de-escalation in the Gulf will drive the trade.
- Crypto: Persistent inflation keeps real yields elevated, a headwind for risk assets including bitcoin, though crypto’s correlation to liquidity expectations means any dovish surprise would cut the other way.
- Dollar: A Fed forced to stay tighter for longer is broadly supportive of the dollar against rate-sensitive currencies.
Key Takeaways for Investors
- Diesel is not a headline-energy story — it is a core-inflation story, and the Fed’s framework may be structurally blind to it.
- Watch the diesel crack spread and Gulf geopolitics as leading indicators for the next CPI surprise.
- The AI capex boom is not disinflationary if it is diesel-intensive; treat AI infrastructure exposure as carrying a fuel-cost tail risk.
- Position for a higher-for-longer rate path until either energy prices retreat or the Fed explicitly acknowledges the pass-through.
