Supply shock

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Supply shock

An event that influences production capacity and costs in an economy.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Supply Shock

Any sudden event that dramatically but (usually) temporarily increases or decreases supply for one or more goods or services. The event may result from government intervention, such as a change in money supply, or may be a random occurrence in the market. For example, a sudden discovery of oil in a field previously thought mainly dry will increase the supply of oil, which will lower the price, assuming demand remains constant. See also: Demand shock.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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In terms of both Iran and Venezuela, it does rather seem that the market is better able to adapt to short term supply shocks than in the past.
The agency pointed out that the 'uptake of prices was mainly caused by supply shocks, including supply shortages in rice, fish and also due to high global oil prices.'
The BSP raised interest rates by 175 basis points for five straight rate-setting meetings since May last year to curb rising inflationary pressures brought about by supply shocks. However, the central bank took a breather from its tightening episode last Dec.
"However, monetary policy tools are utilised to anchor inflation expectations, contain demand-side pressures, and second-round effects of supply shocks.
BSP Director for the Department of Economic Research Dennis Lapid said the slash in all three inflation projections were 'consistent with the notion that supply shocks are not a permanent influence on inflation.'
Annual inflation reached historically low levels at 2.5% in July, but will rise towards the central bank target of 4% by the end of 2018 as favourable supply shocks reverse.
"Prices are particularly vulnerable to additional supply shocks at present, given limited spare capacity among OPEC members and declines in stocks.
I find that non-oil and total investment have also become more responsive to demand shocks and less responsive to oil supply shocks since the shale boom.
While strong economic growth and low and stable inflation have resulted in increased food security in East and South Asia, and has, consequently, led to a decline in the extent of undernourishment in these regions, factors such as climate-related supply shocks and conflicts and violence--and sometimes a combination of the two phenomenon--have affected regions like Sub-Saharan Africa and Southeast Asia, and have worsened the food security in these regions in recent years.
"All of this is by the way of saying that when it comes to responding to inflation, monetary policy is not the only game in town; non-monetary intervention can go a long way towards addressing inflation pressures especially in the face of strong supply shocks," he added.
Summary: How supply shocks, geopolitical risks will play a role in the near future