The economy continues to face many challenges and headwinds with the most concerning being high and persistent levels of inflation, while growth shows signs of slipping. It's too early to say whether this slowing is more of a 'soft landing' or will become a recession.

However, one very concerning development for stock market bulls is what we are seeing with gasoline and diesel prices. While many commodities and economic indicators have softened over the past couple of months due to the impact of higher rates and diminished economic activity in China, there has been zero relief in terms of diesel and gasoline prices which continue to make new highs.

In a perverse sense, it's another indication of economic resilience as there has been little sign of demand destruction despite such high prices. And, these gasoline and diesel prices inevitably flow into the price of nearly every good or service.

If we take a step back, the gains in gasoline and diesel prices have significantly outpaced the increase in oil prices. It's a reflection of diminished refining capacity, and in some ways, it mirrors what we are seeing in the broader economy and commodity complex with investments in productive capacity lacking for nearly a decade.

In the case of diesel, it is a middle product of the refining cycle along with jet fuel while gasoline is an end-product. It's used in trucking but also for other uses like generators, military vehicles, boats, and trains.

Gains in diesel and gas prices have outpaced oil because refining capacity has declined due to it becoming less profitable over the last decade. Another factor is diesel demand from Europe has increased as Russia supplied the E.U. with nearly 700,000 barrels per day.

Turning these refineries back on is an expensive proposition that could turn sour if prices drop. It's also tougher in an environment with a tight labor market and inflation. A large refiner on the East Coast shut down in 2019 due to a fire, and some refining capacity was refitted for biofuels. Jet fuel demand is also high due to strength in travel.

All in all, diesel and gasoline prices are unlikely to adjust to higher prices in terms of more supply or a drop in demand. This is why inflation could be decelerating in the near term as some of the extremes normalize, and the longer-term trend is higher. It also means higher food costs which will add to strain in certain parts of Asia and Africa.