An Uncomfortable Pair of Sevens

The renewed war with Iran is creating a broad energy shock that is pushing both diesel prices and mortgage rates toward 7%, while complicating the path of inflation and monetary policy.

• The national average diesel price has risen above $6.50 per gallon, while the 30-year mortgage rate is approaching 7%, despite these prices normally being driven by different markets.
• Renewed hostilities arrived after global oil inventories had fallen substantially, causing the shock to spread from crude oil to refined products and pushing distillate refining margins to record levels.
• Diesel prices in the Producer Price Index jumped 24.1% in August and accounted for more than one-third of the increase in final-demand goods prices because diesel is embedded in freight, farming, construction and production costs.
• The energy shock is adding inflationary pressure to bond markets already facing heavy government borrowing and AI infrastructure investment, while the Federal Reserve raised its policy rate by 25 basis points to a 3.75%-4.00% range.
• Higher transportation and production costs reduce household purchasing power, while persistent inflation keeps borrowing costs elevated instead of allowing weaker growth to bring relief.

Takeaway: Investors should treat the conflict as a risk to both inflation and long-term bond yields, with households exposed through higher goods prices and mortgage costs; the extent of the damage depends on how long the energy shock persists.