Higher diesel fuel prices increase transportation costs for goods that rely on trucking. However, trucking company stocks have not shown a consistent negative relationship with rising diesel fuel prices in recent years. The next two monthly charts include overlays of red boxes during periods of elevated diesel prices. Note that these periods include strong stock prices for Old Dominion Freight Lines (ODFL) and XPO, Inc (XPO). ODFL is a U.S.-based less-than-truckload (LTL) transportation company that provides regional, inter-regional, and national freight shipping services through an integrated network of service centers. XPO is a U.S.-based transportation company specializing in less-than-truckload (LTL) freight services, operating a large network of terminals that move palletized shipments across regional and national supply chains.

According to FreightWaves, while diesel is roughly 20-25% of the cost of trucking, fuel costs are typically passed through to the shipper. Thus, trucking companies can manage around higher fuel prices unless trucking customers experience demand destruction from the higher prices. FreightWaves notes that “for shippers, rapid increases in fuel prices can wreak havoc on budgets”.

Because goods markets have already adjusted to significant tariff-related cost pressures, suppliers may attempt to delay passing new fuel surcharges through to final consumers. Unfortunately, recent indicators, like the emergency release of oil from the strategic reserves of the International Energy Agency (IEA) and the U.S. suggest that countries are bracing for an extended oil shock. From CNBC:

“The International Energy Agency said on Wednesday that its 32 member countries would release 400 million barrels of crude from strategic reserves, the biggest coordinated drawdown since the agency was created in 1974 after an oil crisis the year before. The U.S. separately said it would tap 172 million barrels from its Strategic Petroleum Reserve as part of the coordinated effort.”

Given oil prices failed to respond to this announcement, analysts quoted in the CNBC article warned that markets are bracing for a protracted war along with the need for countries to refill the petroleum reserves at some point in the future. Shipping has essentially ground to a halt through the Straight of Hormuz. The resulting 15 million barrels per day lost in crude and refined products will push strategic reserves to their limits.

Even after the current oil shock subsides, diesel prices may stabilize near recent levels rather than returning to the much lower ranges seen before 2021. The chart above of diesel prices shows that the lows that held through much of 2025 were far above the lows from 2009 to 2020. Thus, normalization will be a relief, but the price of diesel will remain elevated and create a floor for the input prices of many goods.

Be careful out there!

The post Diesel Fuel Prices Surge Toward Levels Seen in the Last Two Inflation Shocks appeared first on Inflation Watch.

Waller’s Case: Tariff-Driven Inflation Is Transitory

Just two days after Federal Reserve Chair Jerome Powell insisted that meaningful inflation is coming, Fed Governor Christopher J. Waller shared a nearly polar opposite narrative. Of course, given Waller may be on the short list of the President’s next pick to head the Federal Reserve, he has a built-in motivation to speak with authority in support of the administration’s claims that tariffs are not a threat to inflation. During a CNBC interview, Waller made the case for transitory and immaterial inflationary impacts from tariffs that would allow the Fed to start cutting rates as early as the July meeting. Waller explained that the Fed had paused for six months fearing inflationary impacts from tariffs that have yet to materialize. He chose to look through the ongoing uncertainty on tariff levels, timing, and frequency of change, as well as the recent Beige Book, which was full of accounts of businesses preparing for or already responding to tariff risks. Moreover, Waller claimed that only about 10% of the price index comes from imports (which made me wonder why there is any fuss over tariffs!). Instead, Waller expressed greater concern about the potential economic weakness caused by tariffs and stated he does not want to wait to cut until “we see a crash.”

Waller also referred to a speech he gave in South Korea in early June that laid out the detailed economic case for looking through tariffs as a one-time price shock. In “The Effects of Tariffs on the Three I’s: Inflation, Inflation Persistence, and Inflation Expectations,” Waller concluded that “the economics behind a tariff increase implies it should have a transitory effect on prices—tariffs raise prices once, but those prices don’t keep going up.” This conclusion holds if tariffs are hiked all at once in a one-and-done fashion. Otherwise, this reassurance reinforces the same argument Treasury Secretary Bessent made at the beginning of the tariff drama, trauma, and noise. Assuming that long-term inflation expectations remain anchored (as they are in market-based measures and professional forecasters, not in consumer-level surveys), Waller concluded “the tariff-induced inflation will be transitory and [the Fed] should look through it when setting policy.”

Powell’s Caution: Don’t Rush the Cuts

When Powell appeared on June 24th in front of the House committee to deliver the semiannual monetary policy report before the House Financial Services Committee, he was, of course, peppered with questions about tariffs and inflation. At one juncture, Powell took the opportunity to agree with Waller with an important condition (emphasis mine): “I do agree that basically if things are a one-time increase, then you don’t respond to them. That’s the whole idea if there’s a shock to prices… generally speaking you don’t respond if you are highly confident that it will just be a one-time shock.” Powell went on to caution that this particular situation is “a complicated one,” and said the Fed must make this decision about the timing of rate cuts “with some care.” He added that the Fed has not yet reached a point of price stability, and these large tariffs “raise kind of more concern” given the economy is just a few years out from a highly inflationary environment.

Powell’s caution appears warranted. Attempts to pattern-match to past history are challenging because of the scale and magnitude of the potential tariffs. The volatile implementation of economic policy means the Fed cannot be sure that tariff hikes will be a one-time episode. So, while a coming price shock may move inflation away from target, there remains some uncertainty about whether the Fed will be able to watch inflation settle back to target.

Bowman and Daly Lend Conditional Support

Vice Chair for Supervision Michelle W. Bowman added commentary on monetary policy in a speech the day before Powell’s testimony: “Assessing the Effectiveness of Monetary Policy During and After the COVID-19 Pandemic,” at a research conference sponsored by the International Journal of Central Banking and the Czech National Bank in Prague, Czech Republic. Bowman positioned herself as supportive of imminent rate cuts, although she did not specifically target July. Instead, she outlined broad conditions supportive of rate cuts: “If inflation remains near its current level or continues to move closer to our target, or if the data show signs of weakening in labor market conditions, it would be appropriate to consider lowering the policy rate, moving it closer to a neutral setting.” Bowman shared Waller’s concerns for the economy and stated that inflation appears on a sustained downward path to the 2% target:

“As we think about the path forward, it is time to consider adjusting the policy rate… we should recognize that inflation appears to be on a sustained path toward 2 percent and that there will likely be only minimal impacts on overall core PCE inflation from changes to trade policy. We should also recognize that downside risks to our employment mandate could soon become more salient, given recent softness in spending and signs of fragility in the labor market.”

Bowman expressed reassurance in the lack of inflationary impact from tariffs to date: “It appears that any upward pressure from higher tariffs on goods prices is being offset by other factors and that the underlying trend in core PCE inflation is moving much closer to our 2 percent target than is currently apparent in the data.” While acknowledging some upside risks for inflation, Bowman emphasized that she is “not yet seeing a major concern, as some retailers seem unwilling to raise prices for essentials due to high price sensitivity among low-income consumers and as supply chains appear to be largely unaffected so far.”

On Bloomberg Surveillance, June 26, Federal Reserve Bank of San Francisco President Mary Daly capped the dovish commentary by leaning toward the third of three timing scenarios for inflation:

1. Delayed, tariffs will have some impact and will be more persistent.
2. Delayed but will be one-off.
3. Does not deliver the punch history suggests will come as businesses absorb costs.

Daly stated that her “modal expectation” had been for some time that the Fed would be ready to cut rates in the fall. Thus her current dovishness is consistent with prior stances. Daly acknowledged tariffs “will potentially raise inflation.” However, since the impact should dissipate over time, it should not build into inflation expectations.

Rate Cuts, Politics, and the Fed’s Legacy

As the Fed’s debate about the impact of tariffs on inflation plays out, I am reminded that there is a larger context that influences how the Fed positions itself. The Federal Reserve was slow to respond to inflation in the throes of the pandemic, assuming that the price shock would be “transitory.” Even though he brought back the term “transitory,” even Waller revealed, “I am willing to admit that, at the time, I underappreciated how the large and sustained fiscal response would combine with highly accommodative monetary policy to overstimulate aggregate demand in an economy that quickly recovered from the early effects of the pandemic.” Waller is full steam ahead on team transitory again, while Powell continues to act like someone who still feels the scars. Powell’s caution makes even more sense in this context.

While Powell insists he is ignoring the political noise about his competence, his unwillingness to follow Presidential orders, and public ruminations about his firing or the looming presence of a shadow Fed Chair, Powell’s adamant stance sure has the appearance of someone trying to prove a point of toughness and independence. Thus, I fully expect Powell to be the “last one” to reluctantly move forward with rate cuts. I even expect his messaging at the time of the first rate cut to place responsibility squarely on the broader Fed… and to include some residual hawkishness of his own.

Overall, I lean toward Powell’s caution for all the reasons he gave to Congress. The environment remains highly uncertain, and the Fed has not yet reached its price target, even as a large price shock looms. Cutting rates in the midst of this swirling dynamic would signal a high degree of confidence in the post-shock equilibrium. Moreover, the Fed may have fundamentally different reads on the economy. For example, Daly insisted that “there are no warning signs that the economy is weakening, although progressing more slowly than before.” So if the Fed is both hampered by lower-quality data (due to federal budget cuts) and divided on the economy’s health, proceeding with rate cuts sooner rather than later seems doubly risky.

Conclusion

I will be highly surprised by a July price cut. Indeed, the CME FedWatch tool shows just a 21% chance of a cut, while September’s meeting has a 96% chance. These high odds essentially lock the Fed into cutting rates at the September meeting in order to avoid shocking the market. The messaging around that rate cut will be critical. Moreover, will the bond market get spooked and send long-term rates higher, just as it did both times the Fed cut rates last year?

The volatility index (VIX) sure looks incredibly low given the potential fireworks ahead. After breaking support from the dawn of the tariff drama, trauma, and noise, the VIX started this week right on top of that line.

Be careful out there!

Full disclosure: no positions

The post Powell vs. Waller: Divided Fed Faces Tariff-Driven Inflation Uncertainty appeared first on Inflation Watch.