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
"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