The first half of 2022 brought some unpleasant surprises, from historic rises in fuel costs to inflation at levels not seen for decades. Now that the initial shock has been absorbed, the questions being asked include: How much higher will these two critical indices rise, and when can any relief be expected?
The Multi-Faceted Impact of Inflation
While most people understand the fact that inflation lowers the purchasing power of their dollars, few understand its true impact. When prices for manufacturers and producers increase, they are ultimately left with no option but to pass them on to consumers in a variety of ways. For truckers, this process has both immediate and long-term consequences.
Of course, the increase in fuel prices is a primary cause of concern. However, fuel prices are not just driven up by inflation, as we discuss below. When prices rise, at some point the demand for products fall. Consumers tighten their belts and defer spending on non-essentials. This, in turn, lowers the demand for trucking, since more than 80 percent of all those goods are moved through the economy by trucks at multiple points.
This falling demand for shipments then affects shipping rates, often resulting in significant declines. The double whammy of truckers facing higher fuel and other costs with the drop in shipping volume is why the issue is so critical to the industry and drivers.
Pressures on Fuel Prices
Over the past few months, there has been a simplistic effort to blame the rise in fuel costs on the conflict in Ukraine. While that has been a factor, the unfortunate mix of other events and factors has made the rise steeper than was anticipated. While inflation is included in that mix, it is less significant than the forces of supply and demand. Policies over the past few years have resulted in a significant drop in the production and supply of petroleum. Additionally, the closing of refineries and shifts in product mix have also lowered supplies at the diesel pump.
On top of these issues, the demand for fuel has increased with the slow return to “normal” after the pandemic-caused slump in demand. Combined, the price paid by truckers for a gallon of diesel has been and is being driven up by an unpleasant mix of forces.
Looking Forward to December 2022
Unfortunately, there are not a lot of reasons for positive expectations for a major drop in prices or inflation. While there has been some small decrease in the record fuel prices, many fear this is temporary. The primary focus now by regulators and the government is to stop the rapid increases and gain some stability with minimal drops.
The Federal Reserve is the government body tasked with using various tools to control inflation. The latest news on that front is that they will use one of those tools, raising the discount or interest rate charged to banks, by at least .75 percent in July. This is in addition to recent increases and is viewed as a significant jump by analysts. They are hoping that this step, along with what seems a softening in demand, will at least avoid another record month like the recent June’s 9.1 percent increase in the consumer price index.
Unfortunately, even if this short-term action produces positive results, the consensus among analysts is that we are in for a bumpy ride in fighting this cycle of inflation. Most forecasts see any hope of a return to normalcy 18 to 24 months out.
As for the price of diesel, some encouragement came from the increase of production promised by OPEC members. Still, while the average price of Brent crude was $72 per barrel in 2021, the U.S. Energy Information Administration forecasts an average of $104 per barrel for 2022. This results in a forecast of an average of $4.73 per gallon of diesel through 2022, with a bright spot forecasting a drop to an average of $4.07 next year.
All in all, the final two quarters of 2022 will remain challenging. The best hope among most analysts is that there will be no more bad news, with some growing indications that the worst is behind the nation for increases in both inflation and fuel prices.