Diesel prices squeeze Iowa consumers and farmers as costs hit $6.32 a gallon

Diesel prices have surged 68% since the start of the Iran war, hitting a record $6.32 per gallon and threatening to push up costs for Iowa families at the grocery store and beyond. Economists warn the spike will hit lower- and middle-income households hardest as businesses slowly pass along higher transportation and farming costs.

The conflict in the Middle East has curbed oil supply and damaged refining infrastructure, while Russia's war in Ukraine has added further pressure. For Iowa, a state where agriculture and manufacturing depend heavily on diesel, the impact is especially acute.

Why diesel prices matter for Iowa consumers

Diesel is the fuel that powers the trucks, trains, and farm equipment that bring goods to market. When diesel prices climb, the cost of moving everything from groceries to online deliveries rises with it.

“Anything that's on a truck will be impacted by the higher diesel costs, everything from groceries to whatever you'd get delivered to your front door by UPS or Amazon,” said Mark Zandi, chief economist at Moody's.

Unlike gasoline, where drivers feel the pinch immediately at the pump, diesel's impact is less visible but just as real. As one economist put it: “Cars run on gas, the economy runs on diesel.”

How much have diesel prices increased?

Average diesel prices rose to $6.32 per gallon on Tuesday, up from $3.76 per gallon on Feb. 27, the day before the U.S. and Israel bombed Iran, according to AAA. September marked the first time national average diesel prices ever breached $6 a gallon.

By comparison, average gasoline prices were $4.37 per gallon as of Tuesday, up about 47% from $2.98 per gallon on Feb. 27.

The Group of Seven nations agreed Friday to a “substantial release” of diesel stocks to combat rising fuel prices. President Donald Trump also signed an executive order Monday temporarily allowing the broader use of cheaper red-dyed diesel, typically reserved for farm operations, to bring down record-high fuel costs.

What does this mean for Iowa farmers?

For Iowa's agricultural sector, the timing could not be worse. Farmers purchase fuel disproportionately in the fall months during harvest season and often buy fuel in the winter to keep in storage, according to a Goldman Sachs Research note.

Diesel prices account for roughly 5% to 10% of input costs, on average, across crops. Goldman Sachs expects higher diesel prices to boost food prices by 0.2 to 0.4 points cumulatively over the coming months.

“We see risks that food prices could increase further if the increase in diesel prices proves persistent,” the note said.

How much might prices increase at the store?

Economists say the full impact of higher diesel costs takes time to filter through to consumers, anywhere from six months to a year.

As a general rule of thumb, for each $1 increase in the cost of a gallon of diesel, consumers can expect overall inflation to rise by 0.1 percentage points, assuming higher prices are sustained, Zandi said.

With diesel prices up roughly $2.50 per gallon since the start of the Iran war, that would typically add about 0.25 percentage points to inflation, as measured by the personal consumption expenditures price index. The Federal Reserve's preferred inflation gauge was running at a 3.4% annual pace as of August, well above the central bank's 2% target.

“It's going to be another squeeze on the consumer,” said Michael Reid, head of U.S. economics at the Royal Bank of Canada. “And it's really the lower- and middle-income consumers who feel it disproportionately.”

What's being done about high diesel prices?

The Trump administration had been pressuring Europe to release diesel stocks as an alternative to the U.S. imposing an export ban to lower prices. The G7 announcement about a strategic release of diesel likely won't do much to dilute high prices, Reid said.

Goldman Sachs forecasts diesel prices will stay high through 2027.

“The longer we see elevated oil [and] energy prices due to the conflict in Iran, the greater the risks it bleeds meaningfully into the consumer goods space,” Reid said.

For Iowa families already dealing with persistent inflation, the message is clear: higher diesel costs will eventually show up in higher prices at the checkout counter.

Photo: Ryan Jenkinson | Getty Images News | Getty Images